Short circuit
Just five of the world’s 50 biggest public semiconductor players are in Europe. The largest, 222 billion euro ASML, which on Wednesday reported a better-than-expected profit for the first quarter, designs chipmaking machines, not chips. And Dutch peer NXP Semiconductors is U.S.-listed. For policymakers and financial advisers hoping to create a true European chip champ, that leaves the obvious pairing of Germany’s 43 billion euro Infineon with 28 billion euro STMicro.
Infineon was reported to have hired a bank to investigate just such a deal in 2017. Opposition from the French government, which alongside Italy owns 27.5% of STMicro, sank the deal. Arguably the recent renaissance of pan-European industrial policy, including prodigious semiconductor subsidies, makes now a better time. Paris backed the ultimately doomed Franco-German merger of Alstom and Siemens’ rail unit – an effort to fend off foreign behemoths. Why not try the same with chips?
The first challenge is financial: potential cost savings can’t, on their own, fund a rich acquisition premium. According to a Breakingviews analysis of five comparable sector marriages, the average annual synergies targeted in such deals are about 2.5% of combined operating expenses and costs of goods sold. For Infineon and STMicro, that implies about 390 million euros a year. Taxed and capitalised, they’d be worth 3.3 billion euros – enough for a paltry 12% premium on STMicro’s market value.
Infineon’s last big acquisition, of Cypress Semiconductor in 2019, was admittedly premised as much on boosting sales as it was on reducing costs. But even in markets where Infineon and STMicro overlap, like in the areas of automotive and industrial chips, it’s unclear how their technologies could be combined to wring more cash out of major customers.
The final problem is politics. It’s a miracle that STMicro, whose anchor shareholders are France and Italy, isn’t already riven by infighting. Paris and Rome would probably require veto powers and job guarantees in return for accepting a diluted stake in the combined entity. That would make a financially stretched deal even less attractive for Infineon’s investors. Creating Europe’s chip champion looks like a challenging puzzle for even the most PowerPoint-dextrous of M&A bankers.