On July 14, 2016, Infineon Technologies AG and Cree, Inc. that the two companies had entered into a definitive agreement to acquire the Wolfspeed Power and RF division (“Wolfspeed”) of Cree. The deal also includes the related SiC wafer substrate business for power and RF power. The purchase price for this planned all-cash transaction is $850 million.
- Cree reported fourth quarter fiscal revenues (ended June 2016) for the Wolfspeed Power and RF Products business of $31 million, up 7% sequentially. Gross profit/margin for the business was up 3% at $14 million/ 45%.
- Total revenues for the 12 month period ending June 2016 (Cree’s 2016 fiscal year) were $117 million for the Power and RF Products business based on Cree’s annual report and earnings calls. This represented a decline of 6% year-on-year while annual gross profit declined 17% to $56 million for 48% gross margin.
The defense industry was the original driving force behind the development and maturation of the RF GaN supply chain, and Wolfspeed’s GaN RF technology capabilities have been honed to some degree by Cree’s involvement in US DoD research. On the defense front, Wolfspeed has been targeting opportunities in the radar sector and is engaged with defense programs such as Lockheed Martin’s Space Fence. This involvement has allowed the company to achieve DoD manufacturing readiness level eight (MRL 8) designation as well as Category 1A Trusted Foundry status. The implications of a foreign company buying facilities involved in higher/critical levels of the US national infrastructure no doubt raised concerns (as discussed in our earlier post) that Infineon has had to address to allow the deal to close as planned by the end of 2016.
In a briefing with Strategy Analytics, Infineon explained how the company has been working with the Committee on Foreign Investment in the United States (CFIUS) to enable the Wolfspeed operations to be integrated into the Infineon operation while maintaining support for the US DoD.
The driving rationale behind Infineon’s proposed acquisition of Wolfspeed centers on expansion in commercial markets focusing on expanding the power semiconductor and commercial RF sectors. For the former, the acquisition allows Infineon to build on its power electronics technology portfolio through Wolfspeed’s SiC-based products. It complements the International Rectifier acquisition in 2015 which added GaN-on-Si technology along with a broad power product portfolio. On the RF front, the acquisition of Wolfspeed brings GaN-on-SiC to Infineon’s portfolio of technologies with the company citing a transition phase in commercial market requirements that will be best served by being able to offer a breadth of offerings, thus allowing Infineon to respond with greater flexibility to customer requirements.
Infineon has had some exposure to Government sales supplying chip card security solutions for entry/exit into installations and facilities, while the most significant activity for Infineon has involved the supply of security chips for the US passport. Otherwise defense markets have not traditionally been a core area for Infineon, and Wolfspeed’s defense activity was not a major consideration in the decision process that led to Infineon choosing to acquire the Wolfspeed operations from Cree. However, the acquisition of International Rectifier in 2015 increased Infineon’s foothold into the Government sector, and in particular the US, as a result of a hi-rel product line that counted NASA and the US military amongst its customers giving the company an additional foothold into the defense sector.
The experience gained from the International Rectifier acquisition has allowed the company to gain an understanding of the barriers and concerns that the US DoD may raise when foreign companies take major shareholdings in US operations. Central to this will be a “light touch” approach that will keep existing operations working with relative autonomy, and ensure any integration activity into the broader Infineon business is implemented in a measured way.
Infineon is also working with the Committee on Foreign Investment in the United States (CFIUS) and the Defense Security Service (DSS) (an agency within the US DoD that counts amongst its duties the implementation of countermeasures related to foreign ownership, control and influence) to ensure that the appropriate measures are in place to ensure there is no foreign control or influence on defense activity. This is especially relevant to Wolfspeed given the operation’s involvement within higher/critical levels of the US national infrastructure.
Infineon has been working on establishing a Special Security Agreement (SSA) subsidiary (the SSA will not cover all parts of the acquired business) to cover Wolfspeed’s activities deemed as being critical for national security interests by the relevant US-government agencies. The SSA will consist of measures including:
- The implementation of a Board of Directors for the SSA subsidiary that will comprise a majority of US DoD approved external directors;
- Acknowledging the relative importance of Wolfspeed’s technologies to the US DoD by implementing checks and balances to ensure that operational requirements continue to be met moving forwards;
- Ensuring sufficient flexibilities are in place to safeguard US defense/national interests without hindering Infineon’s broader commercial interests.
Infineon maintains that no part of the Wolfspeed operations will be divested in relation to any US defense interests and the measures cited above will allow Infineon to complete the acquisition of Wolfspeed by the end of 2016.
Moving forwards, Infineon believes that its commercial operational scale, manufacturing methods and experience serving reliability and performance driven areas such as the industrial and automotive sectors can be leveraged to further enhance the Wolfspeed operations and perhaps even move them further up the MRL scale.
Ultimately, while an entry into the defense sector was not a considering factor for the company when it agreed to purchase Wolfspeed from Cree, Infineon believes the acquisition will underpin an evolutionary step towards Infineon’s involvement in the defense and broader aerospace sector.