CHIPS: Unigroup Eyes Lattice, in Smaller Approach to Global M&A

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Bottom line: Unigroup’s cautious approach to the potential acquisition of a small US chip maker reflects political realities that make larger purchases difficult, dealing a setback to China’s dreams of quickly building a chip-making giant.

Unigroup buys into Lattice Semiconductor

After being rebuffed several times in the US and Taiwan, China’s ambitious Tsinghua Unigroup is back in the chip acquisition headlines with word that it’s exploring a possible purchase of smaller US chip designer Lattice Semiconductor (Nasdaq: LSCC). Unlike the earlier failed deals that were either outright acquisitions or purchases of major stakes worth billions of dollars, this latest deal is quite small both in dollar terms and stake size.

That would seem to indicate that Unigroup and its affiliated sister companies, all housed at the prestigious Tsinghua University, are shifting to a more cautious approach targeting smaller companies in their global M&A strategy. We saw a similar move earlier this month, when a Shanghai-based government-backed buyer bid for Okmetic (Helsinki: OKM1V), a Finnish chip design house with a market value of about $200 million. (previous post)

As a relatively neutral observer, I can say this newer approach looks a bit more pragmatic than the earlier one, which targeted famous names like leading US memory chip maker Micron (Nasdaq: MU), and disk drive makers Western Digital (Nasdaq: WDC) and SanDisk (Nasdaq: SNDK).

Such a strategy will give the Chinese companies access to the high-tech known-how they crave, even if most such companies don’t actually own production facilities and thus lack actual manufacturing expertise. Such smaller companies are less likely to have much government business, meaning they should be less politically sensitive and wouldn’t be subject to national security reviews.

Compared to the earlier deals, this latest one from Unigroup looks extremely cautious. The Chinese company said in a regulatory filing it has purchased 6 percent of Lattice, a maker of programmable logic chips used in everything from smartphones to cars. (English article) Based on Lattice’s last closing price before the announcement, that purchase would have been worth a very modest sum of less than $40 million.

Unigroup said in the filing its purchase was for investment purposes, but was quick to add that it could boost the stake and was in talks with Lattice’s management about a “possible commercial agreement.” That was enough to get investors excited about a potential acquisition bid, with Lattice shares rising more than 18 percent after the filing came out.

Small Potato

Even after that rise, the US company still has a tiny market value of about $750 million. By comparison, bids by Unigroup and other affiliated companies for stakes of Micron and Western Digital were worth billions of dollars. Micron ultimately called off talks to sell itself last year after several politicians expressed reservations about such a deal. Western Digital also scrapped a plan to sell 15 percent of itself after Washington said such a deal would be subject to a national security review.

On the other side of the Pacific Ocean, Unigroup and other affiliated companies have also announced deals to purchase major stakes of 3 Taiwan chip makers for a combined $2.6 billion. But those deals have also been thrown into question, after a new incoming president said such sales could threaten the island’s security.

Back in China, the Tsinghua companies have announced a series of separate major tie-ups with global tech giants, including Intel (Nasdaq: INTC) and HP Inc. Some of those plans include construction of major new chip-making facilities costing billions of dollars, funded by a huge war chest provided by Beijing as part of its plans to build up China’s chip sector. The Tsinghua companies are also planning to build some major new facilities on their own.

This new smaller and slower approach of acquiring smaller companies with proprietary technology probably represents a bit of a setback for Tsinghua and other Chinese firms trying to help Beijing realize its chip-making dreams. But in this case the group really doesn’t have much choice due to political sensitivities, meaning China’s dreams of creating a global chip giant may get delayed once again.

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