US buyers target Swiss chip firms

Xemics employs 77 people in Neuchâtel Keystone

Two United States companies have bought Swiss semiconductor firms in order to penetrate new markets created by miniaturised wireless chips.

In the latest deal, Californian semiconductor manufacturer Semtech is buying Swiss wireless chipmaker and spin-off from the Swiss Center for Electronics and Microtechnology (CSEM), Xemics SA.

The Swiss subsidiary of the US chipmaker, Semtech International AG, will pay up to $59 million (SFr75 million) in cash to the shareholders of Neuchâtel-based Xemics. The transaction is expected to close at the end of the month.

It’s the second semiconductor firm in the region to be acquired by a US buyer in recent months. The other is Marin-based DSP Factory, which also specialises in miniaturised, low-power radio technology.

The firm was acquired by AMIS Holdings Inc of Pocatello, Idaho, for up to $51.5 million, depending on the achievement of milestones by the end of 2006.

Both firms were exporting low-power wireless radio chip technology.

The acquisitions are being viewed positively by industry insiders. “For a pure play chip company like Xemics, the price is fair,” commented Panagiotis Spiliopoulos, a technology-stock analyst at Bank Vontobel.

Healthy sales

The deals offer several advantages to the fledgling companies as they try to expand their businesses. Both had healthy sales, about $24 million a year each, but they needed more capital to develop the business.

“One problem that small companies have is that product cycles are getting shorter. There is constant pressure to innovate and stay ahead of the market. This requires constant research and development, which requires a significant amount of capital,” explained Spiliopoulos.

At the same time, to justify the spending on R&D, chip firms have to achieve high-volume sales by selling their designs to manufacturers. But being small to mid-sized companies, big-name customers are averse to doing business with them.

“Xemics was trying to win contracts with big-name telecommunications equipment customers, but they were competing with Intel, NEC and Texas Instruments. It was very hard for them to win in such a contest,” said Philippe Mere of Banexi Ventures in Paris, which was the largest shareholder in the company, along with Swiss venture firm TAT Capital Partners.

“Even with $23 million in sales, the firm was seen as too small,” added Mere.

Teaming up with a larger player in the market is a solution. Xemics says that the takeover will enable it to exploit Semtech’s larger marketing organisation and capital resources, as well as its supplier relationships with industry leaders.

“Semtech’s size and infrastructure should accelerate the development of a broad portfolio of new proprietary products based on our unique technology,” Alain Dantec, CEO of Xemics, said in a statement.

Regional benefits

The region’s economic development agency is also hopeful about the transactions. “We see this as recognition of the world-class technology of a local company. It gives them an opportunity for development,” said Alpaslan Korkmaz, deputy director of economic development for canton Neuchâtel (Promeco).

Korkmaz says that as long as the region continues to provide the framework for high-tech industry such as R&D centres, education, and competence or cluster creation – in Neuchâtel’s case it is micro and nanotechnologies – acquisitions such as these will lead to further economic development and attract other international firms.

He offered two examples. In 1991 Johnson & Johnson acquired a fledgling company that produced extremely tiny motors. This company now employs 800 people in the region.

Another example is the luxury label, Gucci, which has acquired two small watch-component manufacturers and now employs 260 people. “These were high-tech companies and probably could have managed to survive on their own but not grow as much as they have done,” said Korkmaz.

This is a rare acquisition for Semtech, which was founded in the 1960s and has a market capitalisation of $1.3 billion. It is strong in power-management integrated circuits, and with the Xemics acquisition it is betting that the Swiss company’s Bluetooth technology will help it enter new wireless and sensor markets beyond the telecommunications market where it is already active.

Xemics was founded in 1997 as a spin-out of the CSEM, which is funded by both private and government sources. It raised about $24 million in venture capital and retained a strong research focus over the years, with some 56 of its 77 employees working in R&D.

It is best known for developing radio chips, particularly for highly integrated battery-powered wireless and sensing applications.

Strategic investment

Unlike Xemics, which has raised some $24 million in venture capital since its founding in 1997, the founders of DSP Factory took a strategic investment and merged with a Canadian firm.

According to Peter Balsiger, who was president of DSP Factory and a major shareholder in the company, the firm had attempted to float its shares on the Nasdaq and the Toronto Stock Exchange.

“Neither public market turned out to be a possibility for the company, and so the shareholders decided to sell,” said Balsiger, who is no longer with the company. One of the results of the sale was a 40 per cent reduction in staff at DSP Factory’s offices in Canada and Switzerland.

High-tech jobs were retained but administration and support functions were lost, according to Balsiger. On a positive note, Balsiger says that AMIS Holding is growing and he foresees additional people being recruited in Marin.

Balsiger is now an active business-angel investor and has set up a company, TF Acceleration Group GmbH, to advise Swiss semiconductor technology firms on corporate finance and business development.

by Valerie Thompson