The Fed cuts interest rates, and a new wave of semiconductor mergers and acquisitions has been initiated!
Time:2024-09-19
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After four years, in the local time on September 18, the Federal Reserve announced for the first time in the interest rate cut, the benchmark interest rate target range down 50 basis points to 4.75% to 5%. And the Fed‘s interest rate cut will be on the semiconductor industry what impact?
The Fed‘s first interest rate cut in four years
During the past four years, the Federal Reserve announced 11 interest rate hikes, the benchmark interest rate from 0 to 0.25% to 5.25% to 5.5%. On September 18th, local time, the Fed announced a rate cut, lowering its benchmark rate target range by 50 basis points to 4.75% to 5%.
This was the first rate cut since March 2020 by the institution. The news of the Fed‘s first rate cut after four years sparked a buzz in the community once it was finalized.
Interest rate cuts are one of the Fed‘s key tools for adjusting the economy. When the economy slows down, falls into a recession, or faces the risk of deflation, the Fed reduces the cost of borrowing by lowering the federal funds rate, which is the interest rate on overnight borrowing between banks, to encourage businesses and consumers to increase spending and investment, thereby stimulating economic growth and raising employment levels. In addition, interest rate cuts are used to respond to financial market turmoil, stabilize market sentiment, improve market liquidity, and provide a hedge against external economic shocks.
Reviewing the time points at which previous U.S. interest rate cut cycles occurred, including the period of the oil crisis in the 1970s, the Savings and Loan Crisis century in the 1980s, the Internet bubble period at the turn of the 20th and 21st centuries, the period of the global financial crisis in 2008, and the period of the global New Crown Epidemic at the beginning of the 2020s, the Federal Reserve made moves to cut interest rates in all these periods. Therefore, it is believed that the current round of Fed interest rate cuts also reacted to the fact that the U.S. economy is in recession.
Generally speaking, interest rate cut cycles in the United States are usually sustained. Historically, the average duration of a rate-cutting cycle in the U.S. has been 26 months, with an average rate cut of 6.35 percentage points. Of course, the above sets of figures are only averages, and the actual rate-cutting cycle will vary depending on the economic situation and the Fed‘s policy objectives.
The impact of interest rate cuts on the semiconductor industry
The impact of the dollar interest rate cuts on the semiconductor industry is mainly reflected in the following aspects:
Stimulate semiconductor consumption and investment: interest rate cuts typically lower the interest rate on consumer loans, thereby stimulating consumption and investment. Consumers can get loans at lower interest rates when purchasing large amounts of goods, such as electronics and automobiles. Therefore, it can be argued that interest rate cuts can increase the purchasing power of consumers and businesses, thereby potentially increasing the demand for semiconductor products.
Enhanced Profitability of Semiconductor Companies: For those semiconductor companies that have borrowed debt, they will pay less interest once the interest rate on their loans decreases, which will directly increase the company‘s net profit and improve its overall profitability. It is worth noting that this change will be directly reflected in the company‘s financial report, and the decrease in interest expense will lead to an increase in the company‘s net profit. At the same time, the company‘s net profit margins and gross profit margins may also increase as a result. This may improve the gross margins of semiconductor distributors, which are often plagued by low gross margin issues.
Improved global market competitiveness: If the Fed‘s interest rate cuts lead to a depreciation of the U.S. dollar, U.S. semiconductor products may become more price-competitive in the international market, with foreign buyers paying less in their home currencies for U.S. products. This situation may also affect the revenue statistics of multinational semiconductor companies in various countries/regions. Specifically, in a period of dollar appreciation, the conversion of revenues in other regions into dollars is more affected by exchange rate factors. At the same time, it may also have an impact on the ranking of various organizations for semiconductor companies around the world.
Increased semiconductor capital expenditures: In a low interest rate environment, on the one hand, borrowing costs are lower and companies can obtain funds at lower interest rates, and on the other hand, traditional savings and investment methods offer lower yields. Therefore, semiconductor companies may look for investment opportunities with higher returns and instead invest in new manufacturing facilities or upgrade existing facilities to improve productivity and competitiveness. Plus, at this stage, all countries have a supportive attitude towards semiconductor investment. It is thus clear that with favorable policies, low interest rates and other favorable circumstances, the trend of semiconductor investment rebound will become more pronounced.
Promoting semiconductor M&A activities: Again, the low interest rate environment will also promote M&A activities due to lower financing costs. Semiconductor companies may take advantage of this opportunity to acquire new technologies, expand market share or enter new market segments through mergers and acquisitions. Taking the global semiconductor M&A trend in recent years as an example, after a semiconductor investment and financing, M&A trough period, especially after entering into 2024, the global semiconductor M&A news is increasing day by day.
At this stage, a new wave of mergers and acquisitions seems to be arriving, in which the mergers and acquisitions of third-generation semiconductor (gallium nitride) companies are quite frequent, specifically including mergers and acquisitions cases include:
In October 2023, Infineon completed the acquisition of GaN Systems, the transaction amounted to $830 million;.
In January 2024, Renesas Electronics announced the acquisition of Transphorm for approximately $339 million, a move that will help Renesas Electronics develop new and enhanced power solutions; and
In May 2024, Power Integrations announced an agreement to acquire the assets of Odyssey Semiconductor, which supports the former‘s continued development of its PowiGaN technology and strengthens its use of GaN technology in power conversion.
In July 2024, Guerrilla RF acquired Gallium Semiconductor‘s portfolio of GaN power amplifiers and front-end modules to expand the former‘s GaN product line and accelerate innovation in RF technology; and
In July 2024, Gallium Semiconductor announced the acquisition of Tagore Technology‘s power GaN technology and intellectual property portfolio, a move that will help Gallium Semiconductor accelerate the development of efficient power management solutions.
At the same time, M&A in the semiconductor sector has also taken on some geographical characteristics, such as with the development of Chinese semiconductor companies entering a new phase. Against the backdrop of globalization, Chinese semiconductor companies have started to acquire key technologies and market share through M&A, which has accelerated their integration with the international market. As the international situation changed, China‘s semiconductor industry began to shift to an autonomous and controllable development strategy. Semiconductor M&A activities in the region have accordingly become more focused on the integration of local Chinese resources and the enhancement of local Chinese technological capabilities.
Semiconductor investor confidence to enhance: interest rate cuts may usually enhance investor confidence in the semiconductor industry as well as the overall market, it is often associated with lead to a rise in the stock market, which can provide semiconductor companies with more financing opportunities. For example, on the 18th, the Fed announced a rate cut news, U.S. stocks straight line up, which spot gold rose nearly $ 20 in a short period of time, the U.S. dollar index fell 40 points in a short period of time.
In short, the Fed‘s interest rate cut by reducing financing costs, stimulate demand and investment, improve profitability and enhance market competitiveness, etc., the semiconductor industry has a positive impact. Of course, these effects are also affected by global economic conditions, industry cycles, technological developments and other macroeconomic factors.
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Elan Tsao