Skyworks announced recently that it would purchase PMC Sierra in a deal totaling $2 billion. The transaction allows Skyworks to diversify its customer base as the semiconductor industry grows more competitive.
Woburn, Massachusetts-based Skyworks Solutions (News - Alert), Inc. develops chips for several industries including aerospace, consumer electronics, wearable technology, and networking. It supplies chips to major companies including Apple (News - Alert), Cisco, and Northrop Grumman.
PMC Sierra is a Sunnyvale, California semiconductor maker focusing mostly on big data. Its chips can be found on RAID controllers and adapters, optical networking hardware, and mobile devices.
There are several reasons for the transaction, some more obvious than others. One of the obvious ones is that it gives Skyworks instant access to the lucrative big data market. The International Institute of Analytics predicted last December that the big data and analytics market would reach $125 billion this year. Even if this prediction turns out to be overly optimistic, the market’s still going to be huge, and it only makes sense that Skyworks would want to be in on it.
Several recent buyouts are putting pressure on the chip market to consolidate. Avago’s $37 billion purchase of Broadcom (News - Alert); Dialog’s $4.6 billion purchase of Atmel; and Intel’s $16.7 billion buyout of Altera demonstrate that the chip business is squeezing out smaller competitors. Skyworks needs this transaction for self-preservation.
One not-so-obvious benefit is that it allows Skyworks to diversify the markets that it is in, protecting the company from huge losses in revenue if one market goes south. Supplying chips to Apple, for example, is a double-edged sword. When people buy lots of iPhones with Skyworks chips in them, life is good, but that could change overnight. Apple could not only go with another supplier, but with billions in cash, it also has the wherewithal to take business away from chip makers by making its own chips.
One of the less obvious reasons is that the deal gives Skyworks more muscle when it comes to attracting customers. According to Fortune, David Aldrich, Skyworks’ CEO, stated that the company has missed out on potential deals in the past because prospective customers thought it was too small to handle the business. According to The Deal, Skyworks could also become the target for a buyout from a company like Qualcomm (News - Alert).
With so much going on in the semiconductor industry, it would be difficult to predict what the future holds for Skyworks. In the short-term, however, it’s obvious that Skyworks needed to make changes to continue as a company and that its purchase of PMC Sierra should be a positive move.