Semiconductor M&A Storm Sparks Industry Shakeup

Following the "M&A Six Articles," the mergers and acquisitions (M&A) in the capital market have been pushed to a climax. As an area highly dependent on technological innovation, M&A has always been a powerful tool for semiconductor companies to capture markets. In this round of M&A, semiconductors continue to play the role of "pioneer," and the recent market enthusiasm has also made many companies involved in this trend favored by the market.

With the impetus of multiple policy benefits, the door to the era of M&A has already been knocked open.

As a typical representative of high investment and long return cycles, the semiconductor industry actively responds to M&A policies, aiming to achieve the goals of saving time costs and deepening the layout of the industrial chain through M&A.

Not long after the "M&A Six Articles" were published, TCL announced its plan to acquire the liquid crystal panel assets of South Korea's LGD in Guangzhou, as well as the related technologies and support services required for operation, with a basic purchase price of 10.8 billion yuan.

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Subsequently, many listed companies have launched M&A and reorganization plans. Statistics from Wind show that after the "M&A Six Articles" were published, companies such as Qinchuan IoT, Fulude, Guangzhi Technology, Electric Power Investment Finance, and Yuanda Environmental Protection have successively disclosed major asset reorganization plans.

In addition, listed companies such as Fulude, Shuangcheng Pharmaceutical, Baiao Chemical, Wenyi Technology, Zhongchuang Environmental Protection, Zhizheng Shares, Aotwei, Guangzhi Technology, and Jingwei Huikai have chosen to cross-industry M&A of semiconductor assets to lay out the company's diversified path and create a second growth curve.

Apart from policy promotion, the rise of the semiconductor industry's M&A tide is partly because the semiconductor industry is at the bottom of the cycle, and the former semiconductor industry is still in a low valuation state.

Semiconductors lead the M&A tide.

The M&A tide of listed companies has risen, and the semiconductor industry has become the "main role."

In 2024, the semiconductor industry gradually recovered, and the prosperity gradually increased, seemingly successfully passing through the industry's downturn cycle that began in the second half of 2022. Coupled with the increasingly tightened IPO policies, domestic semiconductor companies have frequently made M&A moves.A rough estimate indicates that as of October 23rd, there were approximately 40 merger and acquisition (M&A) and reorganization plans involving the semiconductor industry, including companies such as Guangzhi Technology, Jingwei Hui Kai, Shuangcheng Pharmaceutical, Baiao Chemical, Wenyi Technology, Zhongchuang Environmental Protection, Zhizheng Shares, Aotwei, Huadong Heavy Machinery, Debang Technology, SiRui Pu, and Shuangcheng Pharmaceutical, among others.

The sentiment for industry M&A is high, and under a high tolerance, many M&A transaction models have emerged, including cross-industry M&A, "quasi-backdoor listings," and "David and Goliath" style M&A, with some even transitioning into the semiconductor industry through cross-industry acquisitions.

For instance, on the evening of September 10th, Shuangcheng Pharmaceutical announced a preliminary plan for reorganization, intending to purchase 100% of the shares of Aola held by 25 transaction counterparts, including Aola Investment and WinAiming, through the issuance of shares and cash payments.

According to the announcement at that time, after the completion of this transaction, Aola Shares would become a wholly-owned subsidiary of the listed company Shuangcheng Pharmaceutical. Shuangcheng Pharmaceutical would also shift its focus from the production of chemically synthesized peptide drugs to the research, development, design, and sales of analog and mixed-signal chips in the semiconductor industry. The company plans to divest pharmaceutical-related assets in the future, marking the beginning of Shuangcheng Pharmaceutical's transition to a new track through this cross-industry acquisition.

"David and Goliath" cases are also common. Recently, Fulude announced the acquisition of 100% of the equity of Fuluhua, with the company planning to use this to further improve its industrial upgrading layout in the semiconductor industry and accelerate the transition from semiconductor cleaning and value-added services to the production and manufacturing of semiconductor components.

It is worth noting that both of the aforementioned examples involve asset transfers under the same actual controller, which has become a frequently occurring transaction model in the market recently. Shuangcheng Pharmaceutical and its acquisition target, Aola Shares, are jointly controlled by Wang Chengdong and WANG YINGPU; while Fulude and Fuluhua have Japan's Magnetic Control as their indirect controlling shareholders.

In fact, the semiconductor industry itself has strong characteristics of integration and M&A, and many giants in China and abroad have risen to become top companies through a large number of M&As. ASML, for example, has become the world's largest IC photolithography equipment manufacturer through continuous acquisitions of peers and upstream suppliers, innovation, and leading industry technological breakthroughs during its 40 years of development.

With the increased support from China's policies for M&A, semiconductor M&A may enter a new phase.

New Opportunities under the "East Wind" of Policies

The rapid recovery of the M&A market is due to the continuous policy support, and the low valuation status of the industry as well as the cyclical nature of semiconductors are also factors that have sparked a wave of M&A in this industry.Since the beginning of this year, the State Council and the China Securities Regulatory Commission (CSRC) have successively introduced a series of policies to encourage and support restructuring and integration, creating favorable conditions for the capital market.

Specifically, in April 2024, the State Council issued "Several Opinions on Strengthening Regulation, Guarding Against Risks, and Promoting High-Quality Development of the Capital Market," which clearly increased support for stock and bond financing for enterprises that are in line with national industrial policy orientations and have broken through key core technologies. It also intensified the reform of mergers and acquisitions (M&A) and restructuring, and took multiple measures to invigorate the M&A and restructuring market.

In the same month, the CSRC released "Sixteen Measures for the Capital Market to Serve the High-Level Development of Technology Enterprises," focusing on supporting major scientific and technological breakthroughs and giving priority to the listing financing and M&A and restructuring of technology enterprises that have broken through key core technologies. It also promoted the efficient implementation of M&A and restructuring by technology enterprises, helping them to improve quality and efficiency, and to become stronger and better.

Just two months later, the General Office of the State Council issued "Several Policy Measures to Promote the High-Quality Development of Venture Investment," which clearly supported qualified listed companies to merge with technology enterprises through the issuance of stocks or convertible bonds.

Even more significantly, on September 24, 2024, the CSRC issued the "Opinions on Deepening the Reform of the M&A and Restructuring Market of Listed Companies" ("M&A Six Articles"), which clearly supported listed companies to layout around technological innovation and industrial upgrading, and guided more resource elements to gather in the direction of new quality productive forces. It supported the M&A of upstream and downstream assets by companies listed on the Science and Technology Innovation Board and the Growth Enterprise Market, and enhanced the "hard technology" and "three creations and four innovations" attributes.

Specifically, these six articles are: aiding the development of new quality productive forces; increasing the support for industrial integration; enhancing regulatory tolerance; improving payment flexibility and review efficiency; elevating the service level of intermediary institutions; and strengthening regulation in accordance with the law.

Tian Lihui, Dean of the Institute of Financial Development at Nankai University, once stated that the CSRC's "M&A Six Articles" policy will have a significant stimulating effect on the M&A and restructuring market, promoting market activity and corporate transformation and upgrading through specific and strong measures. At the same time, the introduction of market-oriented mechanisms such as the "reverse linkage" of lock-up periods will also stimulate the enthusiasm of private equity institutions for the M&A and restructuring market and optimize the market environment.

It is worth mentioning that while continuously promoting the development of the M&A market, regulatory authorities are also promoting the strengthening of the capital market's legal system and significantly increasing the cost of illegal and irregular behavior.

In addition to policies, valuation and cycles are one of the factors driving the M&A wave in the semiconductor industry.

Zhao Xiaoguang, Vice President and Director of the Research Institute of Tianfeng Securities, pointed out that the Chinese semiconductor industry is currently at the bottom of the cycle and is in the "golden period" of industrial M&A. First, AI is expected to drive a new round of upward movement in the semiconductor industry cycle, and asset values are expected to be revalued in the future. Second, some listed companies have abundant cash on hand, and M&A can help quickly enhance market competitiveness. Third, the IPO has been narrowed down in stages, and the primary market is facing exit pressure. Fourth, there are more measures to support M&A financing, and the "Science and Technology Eight Articles" once again encourage M&A.From a valuation perspective, Huafu Securities pointed out in its research report that the equipment sector has experienced a slightly larger short-term adjustment, but the current sector's PE ratios for 2024/2025 are 22/17 times, respectively, which have already retraced to a lower valuation position. Next year, both advanced logic and memory wafer fabs have good expansion expectations, and it is worth actively paying attention to the bottom opportunities of leading platform-type equipment companies.

Mergers and acquisitions (M&A) heat up the market

The continuous emergence of M&A cases has further driven the investment enthusiasm in the capital market.

According to feedback from the secondary market, companies that have recently completed M&A have seen significant increases in their stock prices. In addition to the investment confidence brought by a technical bull market, the roles of M&A in market expansion, resource integration, competitiveness enhancement, financial synergies, risk diversification, strategic goal achievement, management efficiency improvement, innovation promotion, and brand influence enhancement are also quite important.

Specifically, M&A allows semiconductor companies to quickly enter new markets or consolidate their existing market positions. By acquiring companies that have already established brands in the target market, enterprises can reduce the time and cost of market development and rapidly expand market share. For example, Jiangsu Changjiang Electronics Technology Co., Ltd. (JCET) spent 4.68 billion yuan to acquire Shengdie Semiconductor, which not only expanded its product line but also strengthened its competitiveness in the high-end packaging and testing market.

Affected by this news, JCET's stock price once soared from less than 30 yuan per share to over 40 yuan per share. Although there has been a certain degree of decline since then, it is still clear to feel the market's recognition of the company.

In addition, M&A is also conducive to resource integration, including technology, talent, brand, customer base, and supply chain, etc., through which companies can further improve efficiency, reduce costs, and create new growth opportunities.

Socionext (formerly known as Shanghai Ruipu Microelectronics Co., Ltd.) acquired 100% of Chuangxin Micro's equity for 1.06 billion yuan. Although Socionext's stock price failed to take off, it achieved deep synergistic effects at multiple levels such as technology, product lines, and market channels, providing customers with more comprehensive solutions.

At the same time, M&A can eliminate competitors, reduce market competition pressure, thereby enhancing its own market competitiveness. At the same time, M&A can also help enterprises obtain new technologies or products, and improve innovation capabilities.

The business synergy between Dongxin Semiconductor and Shanghai Lixian has promoted the optimization and improvement of both parties' products in terms of performance and power consumption through collaborative design. With this, Dongxin Semiconductor's stock price successfully doubled within just one month.Additionally, companies like Guangzhi Technology have garnered significant financial favor through a "David and Goliath" acquisition. The company's stock immediately hit the upper limit upon resuming trading and continued to soar for eight consecutive trading days, a trend that has persisted to this day. For the hard-tech sector such as semiconductors, mergers and acquisitions can further assist companies in overcoming the challenge of long return cycles, aiding in their further development.

A research report from Cinda Securities points out that the recovery trend in the semiconductor industry is becoming increasingly clear. With continuous national policy support and the potential for domestic substitution under external pressures, there is still considerable room for growth. Recently, several semiconductor companies have announced merger and reorganization events, accelerating the pace of industry chain integration. As an essential component of new productive forces, the semiconductor industry still possesses strong investment attributes under policy support and favorable industry chain trends.

However, some industry insiders have noted that historical experience indicates that there is a 70% to 80% failure rate in mergers and acquisitions. Therefore, post-investment services should be given more attention, and issues such as culture and cohesion after integration should also be considered.

Zhao Xiaoguang, Vice President of Tianfeng Securities and Director of the Research Institute, has previously stated: "The Chinese semiconductor industry has reached a critical juncture, and an era of survival of the fittest through mergers and acquisitions is about to begin."