On Semi pulls rug from under Microchip

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Microchip has been forced to call off its purchase of Atmel. On Semiconductor, which was going to take Atmel's memory, RF and analogue operation off Microchip's hands has pulled out of the deal citing "the unforeseen deterioration in the semiconductor market since we announced our proposal as well as the unprecedented weakness in the financial markets".

On Semi had to borrow to pay the $1bn in cash needed to buy the Atmel businesses it wanted. The rule seems to be right that if you need to get a loan to buy a company in the electronics business right now, you might as well forget about it. It was tough enough in the summer, as Cadence Design Systems found out. In an environment where even IC unit shipments are falling, as SEMI indicated for the third quarter of the year, you need to be really, really sure you want to make that purchase.

Microchip's problem is that 8bit microcontroller sales in general have flatlined in the past few years. The only way to get any movement in sales is to grow market share, which is tough in the 8bit business at the best of times and very tricky in a recession. Microchip benefited from Freescale (then Motorola) fumbling the ball in the late 1990s and ultimately knocked the Texas-based company off the number-one slot in 8bit microcontrollers in 2006. Freescale, however, is larger than Microchip in the wider market for microcontrollers thanks to a longstanding presence in both 16 and 32bit architectures.

One of the few architectures in 8bit to be less than 20 years old, AVR has built up a solid fan base among embedded-systems engineers. The company wanted a core done properly and got Nordic Semiconductor to design one for it that did not suffer the problems of earlier processors. Among other things, the AVR microcontroller drives the capacitive touch sensing technology that Atmel wants to sell to handset makers keen on making their own iPhone-like devices.

Before the semiconductor business ran into a wall in the Autumn, AVR sales grew as much as 25 per cent from 2007 to 2008. Atmel logged just over $100m in AVR sales alone in the third quarter and took in $144m if other products, such as the 32bit ARM-based devices, are included. Microchip's total microcontroller sales for that quarter were just over $217m. Freescale saw its microcontroller sales slip more than 10 per cent to $408m in the third quarter. With Atmel's help, Microchip would be in a position to catch and ultimately overtake Freescale, although Renesas Technology would remain the world's biggest microcontroller maker.

Without Atmel, Microchip has to rely on comparatively new architectures in its portfolio. In the 32bit space, the company has a major challenge: selling a new architecture based on a design by MIPS against not only Renesas but an aggressive line-up of companies with ARM cores, many of whom have agreed on a binary compatibility system that will make it easy for customers to not only switch products but vendors. Microchip came close to buying an ARM licence but, for whatever reason, decided to go it alone with the MIPS option. And the company faces a headwind trying to sell its higher-end 8bit micros against Atmel's.

It was, and remains, a deal that Microchip really wants to do.