Analyst says chip consolidation isn’t over

By Tom Stundza -- Purchasing, 12/6/2006 7:08:00 AM

Consolidation in the semiconductor industry continues with LSI Logic acquiring Agere Systems, the former semiconductor unit of Lucent Technologies, for $4 billion in stock. Alcatel already has acquired Lucent, and Qualcomm has grabbed Airgo.The latest deal is LSI's bid to boost its presence in the market for chips used in hard drives. All of these deals are occurring against the backdrop of a weakening semiconductor market, setting the stage for further consolidation.

The Semiconductor Industry Association says sales increased 9.2% in October over the same period a year ago, to $21.9 billion. But, in a recent BusinessWeek story, J.P. Morgan & Co. analyst Chris Danely notes that performance was slower than expected and well off the typical seasonal improvement seen in October. That’s why Danely lowered his forecast for 2006 sales to 8% revenue growth for the chip industry as a whole, well below the industry's historical pattern of growing about 15% every year on a compound basis.

The big problem is inventory. Manufacturers ordered more chips than they needed in the months leading up to the holidays, and as such, now aren't ordering as many as chipmakers had hoped they would. This causes an inventory correction during which buyers burn through inventory before agreeing to buy more.