• Investment Blog
• February 11, 2025

Chip Startups Turn to Acquisitions After IPO Struggles

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As 2023 draws to a close, the semiconductor industry is experiencing a remarkable surge in mergers and acquisitions, igniting interest across the market.

Statistics reveal that, as of December 15, 2024, there have been over 2,200 merger cases involving A-share listed companies, with the semiconductor sector leading the charge with 197 dealsAmong the notable cross-industry acquisitions is the purchase of a Wuxi chip company by the "shoe king" of Wenzhou: Aokang International announced plans to acquire equity in Lianhe Storage Technology (Jiangsu) Co., Ltd.

Contrasting with this bustling M&A activity, the initial public offering (IPO) landscape presents a starkly different picture, often being referred to as a "winter" for IPO reviews

As the China Securities Regulatory Commission (CSRC) temporarily tightened IPO scrutiny, regulations for 2024 have become markedly stringent.

Throughout 2023, a staggering 425 companies aiming for A-share listings have terminated their IPO attempts, whether by voluntary withdrawal, failure to pass review, or other reasonsNotably, more than 96% of these withdrawals were voluntary, totaling 408. It's worth mentioning that in the entirety of 2023, only 284 companies had to nullify their IPO ambitions.

Amidst this chaos of expiring IPOs, an increasing number of chip companies, which have failed to go public, are now choosing the path of acquisition instead.

Several semiconductor companies that were part of acquisitions this year had previously sought to go public.

For instance, Suzhou Saichip faced hurdles during its IPO attempts.

Zhaoyi Innovation announced its intention to purchase 70% of Suzhou Saichip's shares, with the total transaction amount reaching 581 million yuan

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Suzhou Saichip had previously prepared for an IPO for two years, only to announce a termination in April of last year.

First starting its IPO journey in 2020, Suzhou Saichip completed a pre-IPO financing round of 215 million yuan at the beginning of 2022. By June of that year, the company had its IPO application accepted by the Sci-Tech Innovation Board, progressing rapidly to the inquiry stage within a month.

However, following this rapid inquiry, Suzhou Saichip's IPO efforts stalled until the withdrawal announcement in April last year, bringing its secondary market ambitions to a halt.

Another example is Yunying Valley, which also faced difficulties in its IPO.

In December, Huida Technology announced plans to acquire 100% of Yunying Valley Technology through share issuance and cash payment.

Before the acquisition announcement, Yunying Valley had undergone 12 rounds of financing and was considered a "darling" in the investment market before 2023.

Prominent investment firms such as Sequoia China and Qiming Venture Partners had invested in the company, alongside industry players like Xiaomi, Hubble Investment, SMIC, BOE, and Qualcomm China.

Yunying Valley also once pursued an IPO

In January 2023, the CSRC disclosed a report about its IPO guidance made by China International Capital Corporation.

However, after that, no further updates regarding Yunying Valley's IPO efforts emerged.

Fulehua is another failed IPO venture.

Fulude announced its plan to acquire 100% of Fulehua, a subsidiary under its holdFulehua had previously shone as a star project supported by 59 shareholders, predominantly institutional investors.

Fulehua, focusing on power semiconductor copper ceramic substrates, was among a select few producing fully self-manufactured products.

In terms of financial data, Fulehua outperformed Fulude in both revenue and net profit in the first half of 2024.

Fulehua initiated IPO guidance back in 2022, and by March 2023, disclosed its fifth progress report for the IPO guidance.

However, Fulehua subsequently halted its IPO process, withdrawing the guidance application in April 2023.

Aola Co., Ltd

faced similar IPO misfortunes.

Shuangcheng Pharmaceutical announced plans to acquire 100% of Ningbo Aola Semiconductor Co., Ltdthrough major asset swaps, stock issuance, and cash payments.

Initially, Aola planned to list independently on the Sci-Tech Innovation Board and submitted its prospectus in November 2022, aiming to raise 3 billion yuan.

However, by May this year, Aola withdrew its application and terminated the IPO process, despite a valuation of 10 billion yuan before the last round of financing.

Xian Zhong Electric also faced obstacles in its IPO.

According to reports, the company did submit an application for IPO guidance early this year, but news thereafter remained dormant.

The trend suggests a looming shift in the semiconductor industry.

Towards the end of the year, Wei Shaojun, the chairman of the Integrated Circuit Design Division of the China Semiconductor Industry Association, sharply criticized the disordered "internal competition" prevailing in China's chip design industry.

Three notable changes have emerged:

First, the industrial concentration remains low

The top ten design companies are experiencing sluggish growth and contributing less to overall industry advancementThe annual growth rate of China's chip design sector recently fell below the global semiconductor growth.

Second, the current industry is marred by chaotic practicesIn recent years, fueled by capital, high input has led to high valuations and talent raids, causing many companies to encounter tight finances and difficulty accessing new funding.

Lastly, the competition in "overly competitive" sectors persistsCommunication and consumer electronic chips account for over two-thirds, with Chinese chip products predominantly seen as low to mid-range

Many companies engage in ruthless competition practices, including cost-dumping, using market monopolies for malicious price reductions, and harsh suppression of competitors, leading to further industrial inefficiencies.

In the past, semiconductor companies typically relied on a series of financing rounds to jack up their valuations to billions, ultimately seeking an IPOThis approach often results in shareholders reaping extraordinary returns upon exit, creating a reluctance to embrace mergers and acquisitions.

However, given the tightened IPO scrutiny from the CSRC, the overall pace of semiconductor IPOs has decelerated, with a notable number of withdrawal announcements surfacing in 2024.

Since October 2024, five companies related to the semiconductor and IoT sectors have announced the termination of their IPOs

This includes companies like Shenzhen Feixiang Technology Co., Ltdand Guangzhou Zhiyuan Electronics Co., Ltd.

With the A-share IPO path narrowing, founders of numerous chip design companies must acknowledge that most companies cannot go public.

From the "New National Nine Articles," which supports listed companies' mergers and restructuring, to the "Eight Articles of the Sci-Tech Innovation Board" that increase merger valuation inclusivity, as well as the "17 Articles of Venture Capital" aimed at expanding exit channels for mergers and restructurings, new policies announcing "Six Articles for Mergers" to bolster support for consolidation are emerging.

Shanghai proposed striving to establish several key industry merger cases by 2027, intending to cultivate around 10 publicly listed companies with international competitiveness in key sectors such as integrated circuits while leveraging a 10 billion yuan integrated circuit design industry acquisition fund.

After setting up the Beijing Integrated Circuit Equipment Industry Investment and Merger Fund in 2020, relevant state-owned capital-backed companies in Beijing are now devising plans to jointly establish a second-phase fund with a total scale of 3 billion yuan.

With IPOs halted and the bubble of high valuations on star projects deflating, project leaders and investors are increasingly turning towards mergers, seeking to secure returns

Through such mergers, there exists the possibility of concentrating China's semiconductor resources as well as integrating industry chains, technology, and talent, which could lead to the emergence of more large or mega-sized semiconductor conglomerates, further strengthening China's technical stance in the global semiconductor market.

Take Yunying Valley, which has decided to "sell" itself to Huida TechnologyThis project can be categorized as a star project based on the backgrounds of its founding team and valuation conditions.

In terms of scale, Yunying Valley is leading in the display driver chip segment, but the market structure in this field is relatively fragmented, with minimal differentiation between competing companies

Currently, there are around five or six firms capturing significant market share in the DDIC sector, but high-end DDICs are still beyond the reach of indigenous companies.

As the companies in China's DDIC sector compete with each other amid fierce competition from domestic and international players, price competition often becomes the prevailing strategy for securing market shareThe founder of Yunying Valley, Gu Jing, had previously commented that "affordability" in the semiconductor industry is a "false proposition"—selling at lower prices translates to thinner profit margins and insufficient R&D investment, which is crucial for the continuous development of chips.

By choosing to abandon its independent IPO route to merge with a listed company, Yunying Valley inevitably considered the need to escape the pervasive "internal competition" present within China's semiconductor landscape.

Industry insiders believe this move aligns with the regulatory environment's current clarity, pushing companies to rethink the belief that IPOs are the only viable path, particularly in a market where internal competition can lead to rejection even with robust financial indicators.

Examining this year's announced semiconductor mergers, a plurality focused on semiconductor materials and analog chips

Acquirers are generally from power management, signal chain, or power IC sectors, such as Hongwei Technology acquiring 100% of Changzhou Mianchuang Electronics, while Naxinwei purchased Maigen for 1 billion yuan.

Additionally, seven semiconductor materials companies have initiated acquisitions, including silicon wafer producers like Lianangwei, TCL Zhonghuan, and Youyan Silicon.

These target companies primarily focus on the semiconductor industry's upstream sectors, marked by intense competition and dispersed layoutsUnder the backdrop of merger activities, concentration within the industry and efficiency in resource allocation could enhance the strength and competitiveness of the semiconductor chain.

Unquestionably, the era in which merely investing in the semiconductor design sector could ensure returns has officially concluded.

This transition will likely eliminate many participants lacking competitiveness, encouraging the market to revert to a healthy cycle while compelling equity investment institutions to prioritize the intrinsic value of competitors rather than solely the battlefield layout.

The coming year is anticipated to be significant.

Since 2021, over 13 universities, including Tsinghua University, Peking University, and Huazhong University of Science and Technology, have established integrated circuit colleges and research institutes

If these colleges adopt a four-year undergraduate system, by next year, China’s semiconductor industry is set to welcome its first batch of graduates specialized in chips.

The pressing question remains: Can this industry sufficiently absorb these graduates and fulfill the promised value of their career trajectories?

The emergence of giants in any industry inevitably involves mergers and acquisitions as a standard strategy—this is equally true for the semiconductor sectorAmidst the bustling activity of mergers, there exists a pressing need to address the clearing and consolidation of the industryCurrent policies favoring mergers and restructuring in the semiconductor domain are reducing acquisition costs while improving efficiency, thereby accelerating industry consolidation.

The Chinese semiconductor industry is now entering a robust growth phase, leading to speculation about whether more large or mega semiconductor groups might surface across various fields in the near future.

This unfolding scenario is indeed something to look forward to.