NXP Semiconductor has for years had a gaping hole in its product portfolio: Wi-Fi connectivity. But when Qualcomm agreed to acquire it in 2016, NXP thought the problem would finally go away. Qualcomm is one of the largest players in Wi-Fi chips and once the deal closed NXP would be able to push them to its customers. So for over two years, NXP held off on any big investments in Wi-Fi technology.
But adding Wi-Fi became "one of our biggest priorities" after the Qualcomm deal collapsed in 2018, said Rafael Sotomayor, general manager of secure transactions and identification at NXP. That was why NXP agreed to buy Marvell Technology's wireless connectivity business for $1.75 billion last month. "We can take what they have and market it to more customers," Sotomayor said at NXP Connects last week.
NXP's rivals are also rushing to add Wi-Fi and Bluetooth products that can be dropped into cars, factories and Internet of Things devices. Infineon is shelling out $10.1 billion to buy Cypress Semiconductor, a leading player in low-power Wi-Fi and Bluetooth chips. On Semiconductor is buying Quantenna Communications for $1.1 billion, aiming to offer its Wi-Fi solutions and software to automotive and industrial customers.
The deals highlight the seduction of scale in the chip industry, which has been reshaped in recent years as companies consolidate to battle mounting costs and slowing growth. Chip vendors are are trying to reach customers in new markets with new combinations of products. NXP plans to introduce "one-of-a-kind" products using Marvell's Wi-Fi and Bluetooth chips and NXP's secure microcontrollers, Sotomayor said.
The deluge of dealmaking also signals the importance of Wi-Fi and Bluetooth connectivity to the Internet of Things market. Vendors are willing to pay hefty premiums for wireless connectivity: Infineon agreed as part of the deal to pay Cypress $23.85 per share, a more than 50% premium to its shares prior to reports about a potential deal. That also represents a roughly 45% premium to Cypress's average share price in May.
Chief executive Reinhard Ploss confessed that the price tag is "a lot of money" but said that the growth potential was worth it. Infineon, which will become the biggest player in the automotive chip market once the deal closes by the first half of 2020, said economies of scale will add $1.5 billion in annual sales within a decade. San Jose, California-based Cypress last year reported revenues of nearly $2.5 billion.
"Our business model is becoming more robust, we are accelerating our profitable growth, and strengthening Infineon's earnings," Ploss said."With this transaction, we will be able to offer our customers the most comprehensive portfolio for linking the real with the digital world," he added. Infineon is the 11th largest supplier of semiconductors in the world. But the combination with Cypress will push it to eighth place.
The intense interest in Wi-Fi technology lines up with the transition to the latest Wi-Fi 6 standard. The Wi-Fi chip market is projected to grow between 5% and 7% on average annually from 2019 to 2022, according to IDC semiconductor analyst Phil Solis. Shipments of new Wi-Fi 6 chips are projected to grow from 500 million units in 2019 to around 4 billion in 2023, outpacing shipments of 5G chips over the same span.
Broadcom and Qualcomm are the market leaders in Wi-Fi chips, which are still primarily used in smartphones and PCs. New Wi-Fi 6 technology will also allow lots of Internet of Things devices to share the same network without overcrowding or straining the battery life of the hardware. Cypress estimates that 75% of the $2 billion market for IoT wireless connectivity solutions in 2019 will be based on Wi-Fi or Bluetooth.
"Wi-Fi and Bluetooth are invading the smart home connectivity space," IHS Markit analysts led by Lee Ratliff wrote in a research note.
Cypress, which bought Broadcom's wireless Internet of Things business for $550 million in 2016, sells Bluetooth and Wi-Fi solutions for connecting everything from smart thermostats to washing machines. The company's wireless connectivity chips can also be used in factories and cars. Infineon is trying to bolster its overall sales by offering Cypress's products to its customers and its products to Cypress's customers.
On Semiconductor is aiming to attract new customers in automotive and industrial areas using Quantenna's Wi-Fi solutions. The company expects Quantenna's products to address a market worth $4.3 billion in 2022, up from around $2 billion in 2018. On Semiconductor said it would pay Quantenna $24.50 per share, an almost 20% premium to the stock prior to the deal, which should close before the end of 2019.
On Semiconductor is paying five times Quantenna's annual sales in the deal. The price underscores the current "scarcity" of Wi-Fi IP, Cypress CEO Hassane El-Khoury said in an April earnings call. But he had doubts about the deal's short-term success: "Quantenna is more focused on infrastructure," El-Khoury said. He added that it would "take a long time to take those high-power processors into the IoT and automotive."
NXP's plan is to roll out Marvell's Wi-Fi and Bluetooth solutions to a much broader customer base. Sales of the assets NXP acquired totaled $300 million in 2018. But once NXP introduces the those Wi-Fi and Bluetooth products to its more than 25,000 consumer, industrial, automotive and other customers, it sees annual revenues reaching $600 million in 2022. NXP expects the deal to close in the first quarter of 2020.
Sotomayor said Marvell's offerings will slot seamlessly into NXP's existing product portfolio. Marvell's Wi-Fi and Bluetooth chips have shipped in major consumer electronic product lines including Apple's iPod, Microsoft's Surface and Google's Home devices, among others. NXP looked at acquiring Wi-Fi assets from other chip vendors. But it concluded that Marvell owned the "last great Wi-Fi IP out there," Sotomayor said.
“The Marvell team was for us The Last of the Mohicans,” he added.