Criteria for Success in SATS Mergers and Acquisitions



We know this is a fragmented industry, an asset-intensive industry, and we just emerged from the worst industry downturn. Everyone was asking the question, "When will consolidation happen in the SATS industry?" Well, it happened! ChipPAC and STATS, the number 4 and 5 players in the SATS industry, respectively, announced the merger of their companies on February 10, 2004. The combined companies now form the number 3 player in overall revenue, with more than a $1 billion revenue run-rate in 2004.

So, what's the strategic rationale behind this combination of ChipPAC and STATS? We are entering what should prove to be a period of change, more far-reaching and fundamental than anything we have seen in the semiconductor industry, which will benefit the SATS industry in the way of outsourcing growth for services we provide.

These changes can be defined within the number of semiconductor package technology requirements to solve the space, cost and performance of a more diversified electronic application base: an "asset-lite" manufacturing strategy by integrated device manufacturers (IDMs); a global market economy requiring a diversified manufacturing base; an industry that has under-invested over the past three years; unit volumes already surpassing the peak of 2000, and growing 10 to 15 percent per year; asset obsolescence due to faster technology cycles and greater financial investment requirements to support all these dynamics.

To be successful going forward, companies must provide a "complete solution". ChipPAC offers a broad portfolio of products and has leading technology positions in advanced packages for semiconductors. STATS is a leading provider of test services, especially in mixed signal. This combination forms one strong, "complete solution" SATS company.

Requirements for Success

The following success factors are the foundation for capturing long-term sustainable value in any merger and acquisition deal:

  • A strong balance sheet. Financially, STATS ChipPAC will have one of the strongest balance sheets in the SATS industry.
  • Strong asset portfolio. The combination will have one of the broadest portfolios of wafer sort, assembly and test product services.
  • Risk management. We have received strong customer and employee support on future value creation.
  • Capabilities/technology. Each company brings strengths to the combination. STATS is a leader in test, while ChipPAC is a leader in advanced package development and manufacturing.
  • Integration complexity. STATS and ChipPAC have very little overlap of customers, resources and product duplication. This allows for continued operational focus and execution.
  • Scale. Scale is an important factor in the SATS industry in terms of purchasing power, breadth of product offering, manufacturing volume, technology leadership and ability to invest.
  • Market diversification. The merger company will be evenly balanced between communications, consumer and computing.

State of Mergers

The majority of mergers and acquisitions fail. CEOs and board members are more keenly aware of their responsibilities than ever before. A disciplined process must be undertaken to gauge whether a transaction is going to create real value. It cannot just be intuitively attractive. STATS ChipPAC has gone through this disciplined process to ensure customer benefits, competitive impact and operational synergies.

The ability to integrate two companies quickly and seamlessly is crucial to the constituents of customers, employees and shareholders. Poor execution often is the culprit for the high percentage of merger and acquisition failures.

Will we see more consolidation in the SATS industry? Possibly, but most likely these combinations will be defensive and survival-mode transactions. It will be challenging to define further combinations that can meet the success criteria. The best acquisition opportunities will be with IDM companies looking to develop an "asset-lite" strategy.

The competitive landscape in the SATS industry is quickly changing. The forces of globalization, technological change and competition for capital show no signs of abating. Customers, employees and shareholders will be attracted to companies that can create increased value.

As the old merger and acquisition adage goes, "One plus one needs to equal more than two." We believe we have all the value levers in this combination of STATS ChipPAC.

DENNIS MCKENNA, chairman and CEO, may be contacted at ChipPAC Inc., 47400 Kato Road, Fremont, CA 94538.