Mercury Systems buys three mil-related Microsemi businesses. This acquisition is the reverse of most semiconductor M&A: an IC company sold to a systems supplier.
Are you all caught up on the consolidation going on in the semiconductor industry? Heck, it looks like the airline industry of 2010 where you can’t remember which company used to be what. I mean…who bought US Air? Right; they actually bought American Airlines. Funny how the American logo lingers. But I digress.
Same deal in semiconductors. Intel has Altera in a $16.7 billion megadeal that closed in December 2015. NXP bought Freescale ($11.8 billion)—and Freescale itself used to be Motorola Semiconductor, co-creator (with IBM) of the PowerPC. Remember the Power architecture? Didn’t think so.
UK-based Dialog Semiconductor, whoever they are, bought nifty Atmel for $4.6 billion. I always liked Atmel’s broad product line and innovation in the 8-bit arena. (Hear that Microchip? Someone’s got a bead on you.) According to CRN Magazine, 2015 was a watershed year in semiconductor M&A. There are several more I’m not mentioning.
Why was it so? Because the darned industry ain’t growing much now that the PC has matured and flattened, along with tablets and smartphones. The IoT offers promise (or hype), while the increasingly frightening and unstable world has people interested in defense spending again. What’s it been—two years since we all decided we didn’t need no stinkin’ military spending? As I write this, Europe just witnessed another devastating terrorist attack. God help them.
Through it all, companies like Mercury Systems (formerly Mercury Computer Systems) stuck to their guns—so to speak—and remained focused on building high-performance military boards, systems, software and IP. That’s why it should come as no surprise that this time, a board-level company like Mercury was the acquirer of three Microsemi mil-focused businesses.
Announced just today, 23 March 2016, Mercury Systems will spend $300 million to buy the embedded security, RF and microwave, and custom microelectronics business units from Microsemi. According to Mercury, the adjusted income of the businesses was around $28 million (EBITDA), making this a 10x buy and quite spendy among recent semiconductor deals.
But there’s much more to this deal than meets the eye, and there will likely be ramifications, too. Firstly, I’ve got some personal familiarity with these Microsemi companies. The embedded group was once the specialty military memory supplier White Electronics, a large supplier to not only the DoD but to many of Mercury’s then-competitors like Dy4 Systems (now Curtiss-Wright). Under Microsemi, the business unit has expanded its offerings by combining technology from the Security Solutions group in West Lafayette, IN.
The Security Group is home to Microsemi’s commercial Whitebox CRYPTOtechnology used to keep secure sensitive IP (such as drug recipes or Hollywood CGI movie originals). Applied to nonvolatile memories and combined with physically-unclonable function (PUF) semiconductors for keys, Microsemi has been working on super-secure military ICs. It’s a sure bet that all of this IP is very attractive to Mercury Systems, their roadmap, and to their DoD customers. In fact, under Mercury the technology may thrive much faster as Mercury’s sales channels are more plugged into the end customer and key programs than a regular semiconductor sales force.
That leaves the third and final Microsemi business unit: the Camarillo, CA RF and Microwave group. I don’t know much about these guys as RF isn’t my thing. At first I thought this was the former Condor Engineering, but they are in Santa Barbara, CA, specialize in MIL-STD-1553 and ARINC-429 ICs, and were acquired by GE Intelligent Platforms (now Abaco) a few years ago. Actually, this is the former AML Communications company purchased by Microsemi for $28 million in 2011. Guess it wasn’t a core fit for Microsemi.
But it will be a fit for Mercury Systems, building up their own RF expertise steadily since buying RF and microwave component and systems supplier Micronetics in 2012. Mercury has a growing RF, microwave and sensor business (called RF/M Components) and the group from Microsemi should fit nicely.
In fact, Mercury Systems has been on a strategic shopping trip since their Echotek purchase 11 years ago. Back then, we all were shocked—even insulted!—that Mercury would take a board (and IC) supplier of data acquisition and mixed signal modules off the market. As with Microsemi’s products today, back then many of the COTS industry’s leading board companies purchased from Echotek.
So this acquisition is the reverse of most semiconductor M&A: an IC company went to a systems supplier. It remains to be seen if Mercury’s new Microsemi groups will continue to sell product to Mercury’s competitors. Oh, sure: this acquisition is too small ($300 million) to attract any DoJ antitrust attention. But I wonder if the likes of Curtiss-Wright or Abaco or any other COTS company that might be doing busiess with these companies will continue to buy from their competitor Mercury.
Still: I’ve got to hand it to Mercury Systems. This is a company that is laser focused on their core competencies of high-performance computing systems. And those systems need the best specialty ICs and intellectual property.
Editor’s note: the author has, or has had material relationships with the companies mentioned in this article. The opinions quoted are subjective and entirely the author’s own.