Tuesday, July 1, 2008
[Originally for Sramana Mitra's site]
Over the past two weeks, we have looked at Infineon’s financials and various business units. Before we proceed to its valuation, it will be useful to examine the company’s key strategic initiatives and growth possibilities if we exclude Qimonda from the picture.
Infineon states its strategic objectives clearly in its 2007 annual report. The company hopes to leverage its strength in energy efficiency and security to remain a semiconductor leader. It sees the growing need for mobility and communications as the drivers for its own growth. As the company is betting on mobile phones and broadband customer premises equipment markets, it recognizes the need to make strategic acquisitions to strengthen these segments.
The company also opts for a mixed manufacturing model. The German chipmaker wishes to retain control over process technologies for RF, power, embedded flash and others that it considers its traditional strengths. For standard CMOS processes, however, it will engage in long-term strategic partnerships with other companies while extensively using the services of silicon foundries.
I see a lot of positives in the company’s strategic plan. Its focus on strengths such as energy efficiency and its choice of an optimal manufacturing strategy are especially commendable. Given its portfolio, the mobile and the carrier markets are obvious growth drivers. Infineon, however, needs to take care as it is pitted against most other semiconductor leaders in these markets, including TI, Qualcomm, Broadcom and STM. Also, while it is certainly a leader in low-power technology and system integration, the competition is rapidly narrowing the gap given the increased thrust towards mobility and convergence.
It also appears that with Ziebart’s exit as CEO, Infineon’s strategy of making small but solid acquisitions may change. I am guessing that the company will now engage in larger M&A activities to gain scale, much along the lines of STM’s recent move to get NXP’s wireless business. The prime candidate being discussed is NXP. An Infineon-NXP merger would create an automobile and industrial semiconductor juggernaut.
With regards to wireless, Infineon’s acquisition of LSI’s mobility business was well motivated: LSI not only offered a sustained baseband program but also brought in substantial 3G IP from Agere to Infineon. Still, as I mentioned in the previous piece, Infineon lacks a full product portfolio to build a complete mobile platform.
This is where a merger with Freescale becomes a viable option. Freescale has its own baseband solutions for UMTS, EDGE and GSM/GPRS. More importantly, it not only has application processor capabilities, but it also delivered the industry’s first single-core modem architecture and has already embarked on long-term evolution (LTE) development. The complementary R&D that Freescale can add to Infineon’s low-power strength can, in my mind, create a powerful mobile wireless entity.
While these are good synergies, the two companies still do not have a complete connectivity portfolio between them. Infineon will probably need to follow a hybrid acquisition strategy, combining the merits of Ziebart’s philosophy while going for scale through Freescale and/or NXP. The company should perhaps go for small acquisitions or long-term strategic partnerships for connectivity solutions to secure and grow its mobile market share.
I also think that with its unique strengths in energy efficiency and low-power electronics, Infineon should look actively into Zigbee and smart energy systems as a diversification area. I believe that smart energy is a burgeoning industry and Infineon, among the semiconductor giants, is best positioned to exploit this growth.
In this post I have looked at various strategic directions and initiatives for Infineon. I have also put forth my vision for the company. With this thorough analysis behind us, we turn to the company’s valuation in the concluding part of this series.