Macroeconomic conditions produce semi 'Haves' and 'Have Nots'

FBR Research has touched on one of the trends this blog has been covering for the past few weeks: the idea that as macroeconomic conditions worsen, opportunity will arise for the stronger companies within the tech sector, and specifically within semiconductors, to increase their strength by acquiring their perceived weaker rivals.

Call it cannibalization, call it survival of the fittest, call it whatever you want — it’s here and it’s happening. Evidence can be found in the sudden onslaught of unsolicited bids: Visahy for IR (withdrawn); Samsung for SanDisk (rejected); Cadence for Mentor (withdrawn).

And in a report this week, the semiconductor market research company broke out a short list of companies (the "Haves") that it believes are positioned to benefit from these crunch economic times by buying lesser competitors, accelerating product development efforts, or buying back meaningful amounts of stock. FBR also noted other companies (the "Have-Nots") that could be forced to take drastic actions to ensure they remain competitive.

In compiling its Haves and Have Nots lists, FBR looked at free cash flow as a percentage of revenues; net cash/debt, in dollars; net cash as a percentage of revenues; share gainer or loser; expected degree of revenue decline; expected degree of revenue decline; margin leverage during sales decline; quality of management; and ability to execute share buyback.

As for the Haves, FBR named, in strength order, Broadcom, Silicon Labs, Intel, Maxim, International Rectifier, and Marvell. Broadcom and Intel are both exceptional strong when it comes to M&A (merger and acquisition) and their inclusion on such a list is a given, in my opinion, although I was a little surprised Broadcom was listed before Intel.

But FBR gave high marks to Broadcom in almost each ranking segment, naming it as one of the "clear industry share gainers," saying it has cash on hand, and noting the fabless company when it looked for product cycles or more stable business models. And once you get past its stock-option backdating scandal, one that’s dragged the company’s founders down into the mud, Broadcom is a nicely managed company (note that current CEO Scott McGregor was not at the helm during the backdating).

FBR’s Have Nots include AMD and Fairchild. The research company was sure to point out that just because a company is considered a Have Not does not mean it is at risk of going out of business or running into serious liquidity problems.

No big surprises with the two. AMD has been struggling for quarters now with management and manufacturing changes still processing through. "We did recently have concerns about AMD’s liquidity position; however, its ‘fab-lite’ announcement last week should put to rest near-term cash-related concerns," FBR said.

And Fairchild just announced Q3 revenue of $428 million, below Street expectations, then guided for a Q4 sequential revenue decline of 6 to 12%.

Middle of the road companies identified by FBR have either little net cash or debt but high profitability, or net cash but lower profitability, and include Microsemi, Linear, LSI, National, Atmel, and ON Semi. "Linear Tech, National Semi, and ON Semi all have significant net debt positions, but the profitability of Linear, National, and ON Semi are all so high that these firms have no liquidity risk, in our view," FBR said.

That’s an awful lot of analog in the lists. It’s also an awful lot of possible opportunity for industry change.

I was very focused in on Broadcom when reading the FBR report. I’ve often described Broadcom as the "little company that could" in my years of covering the company, one that continues to battle for (and often wins) market share from larger companies. It’s good when it comes to knowing when to launch into a market, when to cut back, and when to ride out a downturn (find a timeline here).

While there’s opportunity for all of the Haves FBR noted, as well as some industry players that FBR didn’t note, there’s special potential for Broadcom to grow and shine as the global credit crunch and falling GDP most likely continues.

What do you think? Share your thoughts on the above mentioned Haves and Have Nots and their ability to play in the increasingly colder economic environment below.