MorningWord 9/12/16: Let’s make a deal

by Dan September 12, 2016 10:07 am • FREE ACCESS

The nearly $200 billion in semiconductor m&a in the last 18 months has less to do with what drove the sector historically (PCs & Smartphones) and more to do with emerging technologies like drones, artificial intelligence, augmented & virtual reality, internet of things (IoT) and autonomous/electric vehicles (things you are not yet using in your daily life).

I have written about this on a few occasions of late, so I won’t be redundant. But here’s some links and a few snippets:

MorningWord 8/23/16: Big Gap Tech? …  Who wants to make a deal?

Analog Devices (ADI) is making a near $15 billion offer to acquire Linear Technology (LLTC)

ARM Holdings (ARMH) of the U.K. agreed to be acquired by Japan’s Softbank for $32 billion.

Western Digital (WDC) paid $16 billion for NAND flash chip maker Sandisk (SNDK)

NXP Semiconductors (NXPI) made a nearly $12 billion bid for Freescale (FSL)

Avago Technologies (AVGO) paid $37 billion ($17b cash & $20b in stock) for Broadcom (BRCM)

Intel (INTC) bought Altera (ALTR) for $17 billion in all cash

MorningWord 7/27/16: Who’s got a Semi?: The semiconductor industry is in the midst of one of the most massive waves of consolidation the technology world has ever seen.  Yesterday it was announced that Analog Devices (ADI) is making a near $15 billion offer to acquire Linear Technology (LLTC).  M&A in the sector has been a growing trend over the last year and a half. It’s born out of a desire to gain scale as the industry pushes into new technology, at a time where it is facing a sort of existential threat to existing profit margins (more on that later), but also to diversify away from its reliance on PCs and Smartphones that have for the most part stopped growing, and towards new computing frontiers like the car and the home. There is little sexy about the chips either ADI or LLTC) make, and their components that go into the most exciting electronic products of the last decade, like iPhones, may be in their rearview mirror (pun intended).

MorningWord 5/23/16: Patent Tending: While IoT is one of the buzziest of tech buzzwords, there seems to be some debate as to when and how connected home, cars and wearables will be a big business. For now IoT related sales were likely less than 5% of INTC and QCOM’s sales in the last year. But with PC sales falling off a cliff, and smartphone sales growth flattening, both companies will continue to push into new technologies that offer the potential for new high growth product cycles.

You get the point.  While component suppliers to these emerging technology are playing a massive game of musical chairs, the big boys that have dominated the last 15 years are having a harder time figuring out one of the biggest battlegrounds over the next 15 years will go, the automobile.

Friday night the New York Times reported; Apple Is Said to Be Rethinking Strategy on Self-Driving Cars:

In a retrenchment of one of its most ambitious initiatives, Apple has shuttered parts of its self-driving car project and laid off dozens of employees, according to three people briefed on the move who were not allowed to speak about it publicly.

The job cuts are the latest sign of trouble with Apple’s car initiative. The company has added resources to the project — code-named Titan — over the last two years, but it has struggled to make progress. And in July, the company brought in Bob Mansfield, a highly regarded Apple veteran, to take over the effort.

And this morning, Bloomberg is reporting; Google’s Self-Driving Car Project Is Losing Out to Rivals:

Chris Urmson, the mild-mannered robotics expert who ran Google’s self-driving car project, used to say that when his son reached driving age in 2019 the technology would be available so the teenager wouldn’t have to take a driving test.

In August, less than a year after auto industry veteran John Krafcik took the helm of the project, Urmson left with much work remaining: Google has yet to launch an autonomous vehicle service for the public.

Other top technologists have also departed and progress has been slow. Once considered a leader in the field, Google has lost its first-mover advantage to other companies pursuing more practical, less-ambitious self-driving car services, said former members of the project and other people familiar with the situation. They asked not to be identified because details of the effort are private.

I guess to tackle such a world changing issue like electric & autonomous cars the big boys should leave it to smaller more nimble tech companies like Tesla, right? Well, not really. When you consider the fact that to date Tesla has delivered less than 150,000 car since their release of the Roadster in 2008, and the average price of those cars is 2 to 3 times the average cost of an automobile in the U.S. ($33,000).  Building a new kind of car, (electric, not autonomous) is kind of capital intensive until there is the sort of scale where 150,000 cars are produced in a year. Tesla appears to be at an inflection point on this front, per WSJ, Elon Musk Faces Cash Squeeze at Tesla, SolarCity:

Tesla Motors Inc., which makes electric cars, disclosed in a securities filing Wednesday that it has to pay $422 million to its bondholders in the third quarter, and that it will raise additional money by the end of the year. The purpose of the additional capital, among other things, is to support its proposed merger with home-solar company SolarCity Corp. Mr. Musk is the chairman of both companies.


Tesla has been able to regularly tap various sources of capital to sustain its operations. In the second quarter, it raised $1.7 billion from an equity offering, and its reserves also benefited from hundreds of thousands of $1,000 refundable deposits for its coming Model 3 vehicle.

Tesla’s core business has burned more than $3 billion in cash dating back to late 2014. It has issued equity or convertible debt every year since its initial public offering in 201

Which brings me to a piece on Tesla and Google from Ashlee Vance, the guy who literally wrote the book on Elon Musk, from April 2015 in Bloomberg; Elon Musk Had a Deal to Sell Tesla to Google in 2013:

Earlier in 2013 the company (Tesla) was struggling to turn pre-orders of its vehicles into actual sales. As Musk put his staff on crisis footing to save Tesla, he also began negotiating a deal to sell the company to Google through his friend Larry Page, the search giant’s co-founder and chief executive officer, according to two people with direct knowledge of the deal. Tesla spokesman Ricardo Reyes and Google spokeswoman Rachel Whetstone declined to comment. “I don’t want to speculate on rumors,” Page said when I asked him if Google had considered buying Tesla, adding that a “car company is pretty far from what Google knows.”

The issue with making cars in Silicon Valley is it’s such a different business than what people are used to. The norm is software companies that can globally scale almost instantaneously. Making cars is old skool and labor intensive, no matter what technology you put in them. Musk knows this and his (and his investors’) Silicon Valley instincts often take hold where it seems like maybe TSLA’s real value will be as battery or a self driving software company. He’s even been willing to open source some of their technology in order to jump start a global transition for charging infrastructure. But for now they’re still a car company.

But those other companies care about scale more than anything else. And there’s a ton of cars out there that can ultimately be replaced with at least parts of TSLA’s technology, while combining and establishing dominance within those cars with the Big Boy’s existing platforms (Android, iOS, etc.)  At the very least I would expect an investment from Apple, or Google in Tesla to help shore up capital and align with a technology partner who as a strong vested interest in the transformation of electric vehicles going to the mass market (Tesla’s Model 3 with 375,000 pre-orders expected to be start deliveries in early 2018) and then to autonomous cars at some point in the next decade.

Heck, maybe a $40 billion deal for the company with a $30 billion market cap, and lock up Musk and his desires for outer-space and hyperloops.  Who knows. But one thing is a near certainty. Musk cares deeply about what he is doing and is therefore always willing to take it to the brink. With continued delays in existing products, their battery factory, etc. they are always one credit crisis, or SpaceX disaster away from Musk being on the sort of brink he saw in 2013.  Why not make a deal to ensure his, and his companies future with the sort of buffer that could be created by the balance sheet of the likes of Apple or Google.