They are driving a frenzy for deals at chip firms
Matthew Murphy, a first-time CEO, was barely a year into a turnaround effort at Marvell Semiconductor when he sold its board on a bold move: a $6 billion offer to purchase Cavium, another midsize maker of computer chips.
The offer, made in November, has helped Marvell’s shares soar, as they have been doing during Murphy’s 16month tenure. The 45-year-old chief executive has taken other big steps since succeeding the husband-and-wife team who led Marvell for 20 years, including trimming 1,700 jobs through layoffs and sales of businesses.
“Marvell was a strong company from a technology point of view, but they definitely didn’t have the financial discipline they needed,” said Mark Edelstone, Morgan Stanley’s global head of investment banking for the semiconductor industry. “It took a change in leadership to make that happen.”
Murphy is just one of the people shaking up the once-stolid business of semiconductors, the small slices of processed silicon that crunch numbers and store data in all manner of everyday devices. The founders of many chip companies, typically technical experts, have retired or stepped down in recent years. In their place has come an aggressive set of chief executives quicker to push big acquisitions, slash costs and drive up profits.
Their focus on maximizing shareholder value helps explain the dealmaking boom in the chip industry, which also includes a $105 billion bid by Broadcom to acquire mobile chip kingpin Qualcomm and the completion of Analog Devices’ $14.8 billion purchase of Linear Technology. Though acquisitions in the industry are not new, the slowing sales of many kinds of chips and the stiff costs to develop new ones have led these executives to pursue bigger deals and curtail spending on technology projects that might take years to pay off.
“Founders tend to be much bigger
risk-takers,” said Syed Ali, Cavium’s chief executive, who co-founded the company in 2000. “We are a dying breed, I guess.”
Among those representative of the new generation of chip company leaders is Hock Tan, chief executive of Broadcom. Tan completed six acquisitions in four years before stunning the industry last month with the takeover bid for Qualcomm, which is resisting his advances.
Qualcomm’s chief executive, Steve Mollenkopf, has been no slouch himself, forging a $38.5 billion deal for NXP Semiconductors in 2016 that would reshape his company if completed. And Brian Krzanich, the sixth leader at industry giant Intel, has purchased two large companies for a total of $32 billion since 2015.
Though Wall Street has approved of many of these moves, the way these managers are operating has caused some anxiety. The mood about Tan in particular was summed up in a joke prepared for comedian Wayne Brady, who entertained more than 1,300 guests at a Silicon Valley semiconductor industry dinner this month.
“Big and small companies are here tonight, but beware: None of you are safe from Hock Tan,” Brady said, to considerable laughter. “He’s on a financial rampage to own — well, everyone, apparently.”
Tan is very selective about employees he retains. Public filings suggest that roughly 30 percent of the employees at the five chip companies that Broadcom has purchased since 2013, or more than 5,000 people, wound up without jobs after the deals closed.
That calculation is “not far off,” Tan said in an interview, while noting that many workers also keep their jobs when Broadcom sells off unwanted businesses to other companies. He estimated that the workforce at Brocade, a networking technology company that Broadcom acquired last year for $5.5 billion, would shrink through divestitures from about 5,500 employees to 1,500.
Tan described his strategy as the logical reaction to slowing industry growth and the increased difficulty of taking market share from incumbents. He said he had bought up dominant products in big markets, dispensing with less profitable sidelines.
Many managers at chip companies “think they can engineer their way out of problems,” Tan said. “They’re still fighting the past battles of the industry.”
Another chief executive who has wrung profits from purchased companies is Steve Sanghi, who leads Microchip Technology in Chandler, Ariz. Microchip has bought 17 chipmakers in an acquisition spree that began in 2007.
Sanghi estimated that Atmel, which Microchip bought for $3.6 billion last year, was breaking even at the time and now boasted an operating profit margin of 30 percent. At Micrel, another tech company that Microchip purchased, for $839 million in 2015, the margin improved to more than 30 percent from 6 percent, he said.
“We don’t buy companies to keep doing what they were doing,” Sanghi said. “We buy companies to fix them.”
Not everyone has applauded. Some Atmel employees alleged in a suit last year that Microchip had violated a pledge made by the former management about severance payments associated with the deal. Sanghi said the pledge had expired before his company’s deal, and added that nearly all employees had accepted another severance offer. He took just half his salary for six months to help win over Atmel employees, Sanghi said.
The management changes have not come without conflict with the previous generation of chip executives. Raymond Zinn, who cofounded Micrel in 1978 and led it until the sale to Microchip, criticized layoffs and other moves of Sanghi’s in an interview with Electronic Engineering Times last year. In response, Sanghi attacked Zinn’s management record. The exchange prompted a Micrel suit accusing Zinn of violating a nondisparagement agreement; he has denied the claims.
At Cypress Semiconductor, T.J. Rodgers resigned as chief executive in April 2016 after 34 years running the company — but later led a proxy battle to place two nominees on the Cypress board. The new Cypress chief executive, Hassane El-Khoury, 38, has narrowed the company’s focus, pushed more integrated combinations of chips and software and cut 500 jobs.
“We’ve moved the company in a new direction,” El-Khoury said.
At Marvell, Murphy inherited a thorny situation. The company, which had disclosed accounting irregularities and a Securities and Exchange Commission investigation, was late in filing financial statements and had suffered falling sales. In April 2016, not long after an activist investor, Starboard Value, took a major stake in Marvell, its board forced out the founder and chief executive, Sehat Sutardja, and his wife, Weili Dai, who was Marvell’s president.
As part of the shakeup, Murphy was recruited from Maxim Integrated, the chipmaker where he had worked for 22 years. He said his initial reaction to Marvell had been “I wouldn’t touch that thing with a 10-foot pole.” Then, he said, he discovered a strong core of engineers and key products, including chips used to control disk drives and other data storage gear.
To stave off stockmarket delisting, he quickly released Marvell’s late financial reports. He then began an effort with Marvell’s engineering leaders to identify chips that should be dispensed with as a waste of engineering resources, in order to focus on moneymaking products instead.
“There were a lot of science projects, some of which just didn’t make sense,” Murphy said.
He also instituted Marvell’s annual sales meeting, its first meeting with analysts, regular emails to the entire staff and informal Friday afternoon meetings with groups of employees. A dining room reserved for top executives was relabeled for team dining.
After those changes were in place, Murphy began eyeing Cavium. He figured the company could help Marvell penetrate the cloud data centers run by Internet giants and help it compete against Broadcom, which is much larger.
“You either go bold or go home,” said Rick Hill, who became Marvell’s chairman as part of the Starboard-led shake-up. “We’re not interested in running a small company.”