The US chip industry is gearing up to pack its bags and flee the US to places where they have to pay less tax, according to a leading analyst.
FBR’s Christopher Rolland said that the semiconductor industry is primed for a phenomenon known as “tax inversion” that has already prompted a lot of deal making in the pharmaceuticals industry. This is when a US company moves almost all its equity to a foreign property in order to shelter overseas cash.
Often this is done though buying a foreign company acquisition. Besides a favourable ongoing tax rate, the new entity is often able to repatriate its U.S. cash without penalty, Rolland told Barrons.
Rolland said that the semiconductor industry has witnessed 11 medium to large acquisitions in 2014, and three in just the past few weeks, a wave of tax inversions may serve to accelerate the consolidation process.
He is predicting some bizarre takeovers as companies try to avoid paying US tax. These include Qualcomm for ARM Holdings, Texas Instruments for NXP Semiconductor, Intel for MediaTek, and Cavium for Mellanox, all of which, potentially meet the IRS requirements for inversion, he said.
Romit Shah of Nomura Equity Research reckons that mergers and acquisitions happen in waves and the semiconductor industry is in the middle of a powerful swell.
And of all the recent buyouts, other than SanDisk’s buy of Fusion-io, none add revenue. Buyers are looking at companies with prospects for improved operating expense use, strategic “fit” and valuation.