A $35bn mega-merger strengthens a quiet chip duopoly


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Ttechnology negotiators had a quiet 2023. S&P. Global, a financial data company, estimates that total spending on technology mergers and acquisitions has reached its lowest level in a decade. Big tech has mostly stayed on the sidelines as it fends off the trustbusters. This year started on a louder note. On January 10, Hewlett Packard Enterprise, an enterprise software giant, purchased Juniper Networks, a telecommunications equipment maker, for $14 billion. Less than a week later, Synopsys, a U.S. maker of programs for chip designers, invested $35 billion in Ansys, a computer simulation company.

image: The Economist

The mega-deal highlights an obscure but critical link in the semiconductor supply chain. Like many of his other links, this one is also very focused. Annual sales of chip design software have grown 12% since 2018, twice as fast as the entire chip industry, to around $15 billion. Synopsys and its smaller U.S. rival, Cadence, each capture about a third, estimates IDC, a research company. Siemens, a German engineering giant with 15% of the market, comes in a distant third. The stock values ​​of the two American companies have increased almost sixfold over the past five years (see chart). They are worth almost $80 billion each.

This growth is expected to continue. Chipmakers such as Nvidia and AMD are rushing to design better graphics processing units (GPUs), which technology companies collect to train artificial intelligence models. Big tech model builders are getting into the chip design business themselves, creating bespoke blueprints optimized for training their users. AIs and subcontract manufacturing to contract “foundries” like TSMC from Taiwan. This GPU Racing shortens the time between new chip releases — and more designs mean more licensing fees for software companies. It also reduced Synopsys and Cadence's dependence on a few large chipmaking customers.

This dependence is further diminished by another trend. Although demand for chips has recently been driven primarily by computers, smartphones and data centers, semiconductors are increasingly taking over the economy, powering everything from cars to toasters. These products require silicon adapted to their needs. Ansys' software, which simulates the behavior of electronic systems in the real world, can help with this. It allows system designers to design the packaging of “chiplets,” as the stacks of chips in modern processors are called. Sassine Ghazi, the head of Synopsys, hopes that Ansys' large customer base in every sector, from automobile manufacturing to health care, will open new markets for his company's tools. The merged company will be able to offer them a complete service: Synopsys designs the chips and Ansys simulates the behavior of the systems that contain them.

The deal still needs regulators' blessing. Mr. Ghazi points out that there is not much overlap between the businesses of Synopsys and Ansys, so their merger would not increase concentration in his company's core market. Although trustbusters are wary of such “vertical” mergers in the technology sector, he remains confident.

China is the biggest concern. Nearly 15% of Synopsys' revenue comes from the country, and growth there has outpaced that of any other region. Chinese chip companies buy nearly 90% of their design software from U.S. companies, including Cadence and Synopsys. Security hawks in Washington increasingly want to keep American technology out of Chinese hands, lest it give China a leg up in a larger race: the geopolitical race for technological supremacy.

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