Singapore Semiconductor

The current pace of consolidation can't continue, says Mentor Graphics' CEO Wally Rhines.

The current spate of mergers and acquisitions in the semiconductor industry cannot continue for long, according Walden Rhines, chairman and CEO of Mentor Graphics speaking at a user group meeting in Bangalore, India.

“While the number of transactions is not really out of line when you compare it to the previous years, what really is out of line is transactional value, ” Rhines said. "If that [transactional value] is repeated in the second half of 2015, then we would be seeing an unprecedented phenomenon in semiconductor history.”

According to a CapIQ/Mentor Graphics analysis, the value of the 19 transactions in the first half of 2015 stood at $83 billion compared with $23 billion in 2014 for 32 transactions and $12 billion in 2013 for 16 transactions.

According to Rhines, M&A-involved companies' revenue and R&D are significantly affected after a merger. Once the M&A is complete, many joint entities tend to reduce R&D expenditure, which can have an impact on future revenues.

“If you reduce the R&D investment you will eventually reduce the revenue as per data we have collected over the years, ” Rhines noted.

Layoffs are another fallout of an M&A blitzkrieg. Avago has already announced downsizing in Broadcom. But the good news is that engineers don’t stay unemployed for long, according to the U.S. Bureau of Labor Statistics, Rhines noted. Either they move to start-ups, which are more nimble and agile in terms of innovation, or they move to competitors.

In addition, “the amount of sovereign debt in the world has tripled since 2007. It now stands at $150 trillion and countries cannot pay back the debt they have taken on. Sooner or later something will happen. Eventually interest rates will go up but we don’t know when, ” said Rhines.

“When the government sets the [interest] rate, no free market decides how much the cost of money should be. So it [the cost of money] is always wrong but you don’t know how much it is wrong. It might be just a little bit wrong, but it always wrong and sooner or later you have to pay for that, ” Rhines added.