ON to acquire Fairchild: pioneers join together

Last week ON Semiconductor announced it had agreed to acquire Fairchild Semiconductor for $2.4 billion. The combined company will be a major player in power analog and power discretes. It also combines two companies with ties to the beginning of the semiconductor industry.

Fairchild Semiconductor was founded in 1957 when eight key employees left Shockley Semiconductor. Shockley Semiconductor was founded by William Shockley, a co-inventor of the transistor at AT&T’s Bell Labs. One of the Fairchild founders, Robert Noyce, is credited as co-inventor of the integrated circuit (IC) in 1958 (along with Jack Kilby of Texas Instruments). Noyce and fellow Fairchild founder Gordon Moore left to form Intel in 1968. Fairchild was bought by Schlumberger Limited, an oilfield services company, in 1979. Schlumberger sold Fairchild to National Semiconductor (founded by former Fairchild employees) in 1987. In 1997 Fairchild Semiconductor was spun off from National as an independent company. Fairchild’s history (through 2010) is posted on their web site.

Fairchild was a major force in the founding of Silicon Valley. It is one of the birthplaces of the IC. Several major semiconductor companies were formed by Fairchild alumni. These companies include Intel, National Semiconductor (now part of Texas Instruments), Signetics (bought by N.V. Philips) and AMD.

ON Semiconductor also has roots in the beginning of the semiconductor industry. ON was created in 1999 when Motorola spun off its discrete semiconductor business. Motorola began a semiconductor R&D facility in Phoenix in 1949. In 1955 Motorola began mass production of semiconductors with the first commercial high-power transistor. Motorola spun off the remainder of its semiconductor business as Freescale Semiconductor in 2004. Freescale is the process of merging with NXP Semiconductor. NXP was spun off from N.V. Philips of the Netherlands in 2006. Philips was one of the original licensees of the AT&T transistor patent in 1952 and a pioneer of the European semiconductor industry. Motorola’s history is also online.

ON and Fairchild have significantly different revenue trends since becoming standalone companies in the late 1990s in the midst of a semiconductor market boom. ON’s revenues in 2000 were $2.08 billion. Revenues declined significantly with the market downturn in 2001 and did not recover to over $2 billion until 2008. ON’s revenues increased to $3.16 billion in 2014. Much of the revenue gain since 2008 has been driven by acquisitions including AMIS in 2008, California Micro Devices in 2010, Sanyo Semiconductor in 2011 and Cypress Semiconductors’ image sensor business in 2011. ON has been very profitable for the last few years, with net income percentage of revenues at 14% for 2014 and 15% for the first three quarters of 2015.


Fairchild’s revenues peaked at $1.78 billion in 2000. Revenues never recovered fully, hitting $1.67 billion in 2007 and then declining in the following market downturn. Fairchild’s 2014 revenues were $1.43 billion. Fairchild has been struggling to make profits in the last few years. It had a slight $5.0 million profit in 2013 before a $35.2 million loss in 2014. The 2014 loss was due to $49.8 million in restructuring costs as it closed wafer fabs in Utah and South Korea and an assembly & test site in Malaysia. Fairchild made a $1.1 million profit in first quarter of 2015, but lost $0.9 million in the second quarter and lost $8.2 million in the third quarter.

ON Semiconductor’s November 18 presentation on the Fairchild acquisition highlights the combined strength in power management. Citing 2014 IHS data, ON shows the combined company would be number two in power discretes (after Infineon) with 11.1% share. Their power products should have limited overlap, with ON focused on low-medium voltages and Fairchild primarily in medium-high voltage products. ON plus Fairchild would be the number 10 non-memory semiconductor company based on 2015 revenues, according to ON (in an example of manipulating definitions to fit your message). If memory companies are included, ON plus Fairchild would be the 14th largest semiconductor company.

ON estimates the acquisition of Fairchild would result in $150 million in annual synergies (a buzzword for cost savings) eighteen months after the closing of the deal. Most of the savings will be from reduction in the number of employees. ON has 24,500 employees with most U.S. employees located in Phoenix, Arizona. Fairchild has 6,600 employees with U.S. employees primarily in San Jose, California and South Portland, Maine. Since ON is the acquiring company, most of the employee cuts should be on the Fairchild side. ON probably prefers to focus employment in low cost Arizona versus high cost California and relatively remote Maine.

Will the ON/Fairchild combination be successful? We at Semiconductor Intelligence believe it will be. A moderate amount of revenue will be lost in commodity products since some customers use Fairchild to second source ON and vice versa. These customers will shift some business to a third supplier in order maintain an independent second source. As ON states, the companies have limited overlap in their key power device businesses. ON has a successful track record in integrating acquired businesses. Sadly, the combination will likely result in the eventual disappearance of the Fairchild name. Thus we will lose a link to one of founding companies of the semiconductor industry.

Semiconductor market going negative?

The outlook for the semiconductor market for the remainder of 2015 is mixed. Intel’s 3Q 2015 revenues were up 10% from 2Q 2015 and guidance is for 2.3% growth in 4Q 2015. Most other companies which have announced 3Q 2015 results expect revenue declines in 4Q 2015. The most severe drops (based on the midpoint of company guidance) are -16% from NXP and -13% Freescale. NXP is in the process of acquiring Freescale, with the deal expected to close by the end of the year. Some of the weakness in the NXP and Freescale 4Q 2015 outlooks may be due to customers being cautious and waiting to see how the acquisition works out.

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The latest forecasts for 2015 semiconductor market growth range from a 1% decline (VLSI Research and IC Insights) to 1% growth (our latest forecast at Semiconductor Intelligence). The outlook for 2016 ranges from a negative 0.5% from financial services company Credit Suisse to a positive 6.0% from Semiconductor Intelligence (SC IQ).

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Earlier in 2015 analysts were more optimistic with several forecasts for semiconductor growth of 7% or higher. Our March 2015 forecast at Semiconductor Intelligence was 8%. As the year developed, it became apparent the global economy and electronics end markets were weaker than expected. The chart below compares forecasts for 2015 and 2016 from Gartner released in March 2015 and September 2015 for PCs + tablets and for mobile phones. The most significant change was 2015 PC + tablet shipments dropping from 0.4% growth in March to a 9.3% decline in September. The 2015 mobile phone forecast dropped from 3.5% in March to 1.4% in September. 2016 forecasts changed less, with PCs + tablets dropping from 6% to 1.8% and mobile phones dropping from 3.8% to 2.9%.

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The 2015 global GDP forecast from the International Monetary Fund (IMF) also dropped in the last six months from 3.5% in April to 3.1% in October. The 2016 forecast dropped moderately, from 3.8% to 3.6%. Our semiconductor market forecast at Semiconductor Intelligence went from 2015 growth of 8% in March to 1% in September. Our 2016 forecast has decreased only slightly, from 7% in March to 6% in October.

Why is the change in 2016 forecasts not as significant as the change in 2015 forecasts? A skeptic might say analysts do not alter their forecasts until actual data begins to prove them wrong. We are not quite that cynical. The IMF forecast for 2015 dropped from 3.5% to 3.1% primarily due to slower than expected growth in the U.S., a deeper than expected downturn in South America, slower growth in the Middle East because of falling oil prices, and growth slightly below expectations in India and Southeast Asia. Despite all the concern in the media about slowing growth in China, the IMF’s October forecast for 6.8% growth in 2015 and 6.3% growth in 2016 are unchanged from the April forecast. Conditions still point to GDP growth acceleration in 2016. Despite slower growth in China, the advanced economies (including the U.S., Europe and Japan) should improve in 2016. Russia and South America are expected to begin to recover from 2015 recessions. India and Southeast Asia GDP growth should accelerate in 2016.

We at Semiconductor Intelligence feel confident about reasonable growth in the semiconductor market in 2016. Although there are some areas of concern in the global economy, signs point to better conditions in 2016. The key end markets for semiconductors (PCs, tablets and mobile phones) are also expected to improve in 2016.

Semiconductor inventories under control

The semiconductor market is currently in a slow growth period. After 10% growth in 2014, the market is expected to only show low single-digit growth in 2015. Our own forecast at Semiconductor Intelligence is 1.5%. In several previous market slowdowns, inventories in the channel have climbed as some companies were slow to adjust their inventories to match lower demand levels.

The chart below shows total inventory as a percentage of quarterly revenue for five of the top six semiconductor companies. Samsung is not included since it does not disclose inventory data for its semiconductor business. Most of the companies show no significant change in the inventory ratio over the last six quarters. The exceptions are Intel and Qualcomm. Intel’s ratio went from 29% in 2Q 2014 to 37% in 2Q 2015. This is primarily due to lower revenues, with Intel’s 2Q 2015 revenue down 5% from a year ago. Qualcomm’s ratio climbed from 24% in 2Q 2014 to 41% in 2Q 2015. Qualcomm’s 2Q 2015 IC revenue was down 22% from a year ago due to increased competition for its smartphone chipsets.


Are inventories at electronics companies getting out of alignment with revenues? The chart below illustrates total inventories as a percentage of quarterly revenues for key electronics companies. The companies are six of the top eight purchasers of semiconductors, according to Gartner. The other two are Dell, which is now private, and Huawei, which does not disclose inventory data. The inventory to revenue ratio varies significantly from company to company, with Apple averaging about 4% and Sony ranging from 30% to 50%. These differences are due to factors such as number of product lines (relatively few for Apple, numerous for Sony) and supply chain strategy. Some companies (such as Sony, Samsung and Lenovo) tend to build inventory in the third quarter in anticipation of stronger fourth quarter sales. None of the companies show any significant change in their inventory ratio for 2Q 2015 compared to a year ago.

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The links in the semiconductor supply chain which usually show the largest variation in inventories are distributors and electronic manufacturing services (EMS). The chart below displays the ratio of total inventories to quarterly revenues over the last fifteen years for major distributors and EMS companies. The two largest semiconductor distributors, Avnet and Arrow Electronics, are used for the distributor ratio. Each company has over $20 billion in annual revenues. The EMS companies are Jabil, Sanmina, Flextronics and Celestica. Hon Hai (Foxconn) is the largest EMS company, but it does not disclose inventory data for its EMS business.

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When the Internet bubble burst in 2001 the semiconductor market plunged 32%, following strong 37% growth in 2000. Distributors’ inventory ratio peaked at over 80% from the low 60% range in 1999. The distributors did not reduce their inventories quickly enough to match the decline in revenues. Since 2001, the distributors have done a better job of managing inventories. For the last eight years their inventory ratio has held at close to 40%.

The EMS companies were caught by surprise by the semiconductor downturn. Most of these companies did not become significant factors in electronics manufacturing until the 1990s and did not experience the previous double-digit semiconductor market downturn in 1985. Their combined inventory ratio ballooned to over 70% from below 50% in 1999. Flextronics, the largest EMS company at the time, saw its ratio double from 44% in 2Q 1999 to 87% in 1Q 2001. The EMS companies reduced the ratio to 39% in 4Q 2004. As the semiconductor market slowed from 28% growth in 2004 to single digit growth in 2005 to 2007, the ratio jumped to 55% in 1Q 2007. Since 2007 the ratio has been fairly steady, even through the 2008-2009 semiconductor downturn. In the last few years the ratio has risen slightly from about 50% in 2011 to 57% in 2Q 2015. This latest increase in the ratio is likely due to deliberate plans to run higher levels of inventory following conservative inventory levels in 2010 and 2011.

Semiconductor inventories appear to be under control throughout the semiconductor device supply chain. Thus companies are making adjustments for the slowdown in the semiconductor market. Companies walk a fine line between carrying too much inventory – which can become a major burden when demand falls off – and too little inventory – which can lead to missed sales when the market is growing. The improved inventory management is largely due to better inventory management systems and better communications between semiconductor suppliers and the buyers of their products: electronics companies, EMS companies and distributors.