SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among semiconductor manufacturers. We look at why they are compelling and why each could be a fit for a blank-check merger.
The market has just one word for you: semiconductors.
With the growth of connected devices far outpacing supply of microchips, the top 10 semiconductor manufactures just logged their biggest quarter on record for the sector with $22.7 billion in revenue in the first quarter of 2021. This marked a 20.5% increase from the same period the year before and the supply crunch fanning this rise is not expected to abate until at least 2023.
The intense demand for semiconductors is also coming from sectors that are both hot – like gaming consoles and automotive tech – and strategic in the case of defense and industrial technology. That latter point has put Western manufacturers in focus because seven of the aforementioned top 10 are based in China or Taiwan and number two player, Samsung (KRX:005930), is similarly Asia-based.
The two non-Asian manufacturers collectively represented just 6% of the top 10’s revenue to start the year and posted growth rates among the cohort’s slowest despite the uniquely high demand of the moment.
As such, the search is on for American or European semiconductor manufacturers that might be able meet the moment with the right amount of capital. SPACs have already jumped in with Thunder Bridge II’s (NASDAQ:THBR) December deal for Indie. Three more SPAC semiconductor deals have been announced in 2021. First, Ace Convergence (NASDAQ:ACEV) announced with Achronix in January followed by Live Oak II (NYSE:LOKB) and PTK’s (NYSE:PTK) announcements with Navitas and Valens, respectively in May.
The best shot for creating a dominant US-based semiconductor player may come from the existing upper crust with number four player GlobalFoundaries.
Headquartered in Malta, NY since April, GlobalFoundries is by far the largest private player in the sector whose 19 international offices include three manufacturing centers in the US, one in Germany and a fifth in Singapore.
Its current market exposure touches upon all the right sectors as well with its chips in automotive lidar and radars as well as consumer applications in connectivity, mobile and internet-of-things (IoT) devices. Its real edge may be in its industrial applications, however.
22FDX MRAM, GlobalFoundries’ latest industrial semiconductor, is already flying off the assembly line, accounting for $4.5 billion in contracted sales and 350 million chips already shipped. It powers communication and control functions for autonomous and manned industrial equipment, and demand in those spaces shows no sign of slowing down.
This promise has not gone unnoticed by suitors, and the company has recently been reported to be considering an IPO that would value it at about $30 billion. It would be far from the first IPO candidate snatched up by a SPAC, but the deal would mark among the SPAC market’s largest.
With Bill Ackman’s Pershing Square Tontine (NYSE:PSTH) negotiating a deal for Universal Music, that leaves six other SPACs with over $1 billion in trust best positioned to make a mega deal for GlobalFoundries. Among these SPACs – KAHC, ASZ, CVII, IPOF, JWSM, AAC – Social Capital VI stands out given CEO Chamath Palihapitiya’s flair for the bold tech play that has a timely story to tell.
There is at least a good chance GlobalFoundries would be willing to do a SPAC deal. It has been wholly owned by Mubadala Technology since 2012. The Mubadala Group was a major investor in Cazoo, which announced a combination with AJAX I (NYSE:AJAX) in March and the group also participated in Altimeter’s (NASDAQ:AGC) PIPE in its announced combination with Grab.
Unlike GlobalFoundries, Austin, Texas-based Alereon has kept a relatively low profile while raising about $120 million in outside funding. This is in part because many of its contracts have been in military contexts.
Alereon’s ultrawideband (UWB) chips allow for soldiers’ positions to be tracked and equipment to wirelessly connect, replacing legacy plugged and cabled solutions. In the chaotic battlefield setting, having connections that cannot be snagged, accidentally unplugged or severed due to damage is particularly vital.
The company’s hardware has been shown to be able to transmit high-bandwidth video while maintaining low-frequency contact to other devices all within a hard-to-detect UWB network surrounding an individual soldier.
On the consumer side, Alereon’s components can eliminate cords in the home internet and video realm as a lower-latency alternative to wifi connections. Its UWB connections can even replace high bandwidth physical connections like USB and HDMI.
Alereon components are also prevalent in medical devices and displays where excessive cords can be a liability and stakes are high. Overall, the global UWB device market is expected to grow at a CAGR of 19.6% to $2.7 billion in 2025.
At a time when targets have been able to play SPACs against each other in negotiations, familiarity is also key. Kneeland Youngblood, who serves on Alereon’s Board, is also a director for both TPG Pace Beneficial II (NYSE:YTPG) and TPG Pace Solutions (NYSE:TPGS)
While the two aforementioned companies have been around since the 2000’s, Xsight is the relative baby of the bunch, having been founded in 2017.
In that short time, however, the Israel-based company has raised $280.5 million through five rounds and came out of stealth mode in December with its X1 product line. The X1 works as a data center switch, and Xsight claims it can provide the highest power efficiency on the market for cloud data centers.
Having been on the market for such a short time, Xsight has kept its initial sales figures close to the vest, but it raised its largest funding round three months after its exit from stealth. That $150 million Series D was led by frequent SPAC PIPE participant Fidelity Management & Research Company, but also had participation from the venture arms of strategic computing players Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Xilinx (NASDAQ:XLNX).
These large potential customers choosing to buy equity in Xsight is a greater endorsement of the X1 than mere product purchases. The company’s chairman and founding investor, Avigdor Willenz, also has a strong track record. He has sold four previous semiconductor enterprises to Marvell (NASDAQ:MRVL), Amazon (NASDAQ:AMZN), Cisco (NASDAQ:CSCO), and Intel.
The recent rollout also puts Xsight into that sweet spot where a SPAC team can sell the deal as offering retail investors a spot on the ground floor of the company that may about to be a cog in data centers around the world.
Xsight is the sort of company sure to be on the radar of Gilad Shany’s two SPACs – ION 2 (NYSE:IACB) and ION 3 (NYSE:IACC). Both are focused on the Israeli tech scene, with his first vehicle announcing a $2 billion combination with Taboola in January.