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Taiwan's Silicon Valley Shopping Spree

Silicon Valley is like a bankrupt store up for auction. Quite a few small companies with high innovation and R&D potential can be had for a good price, and many of the buyers are from China and Taiwan.

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Taiwan's Silicon Valley Shopping Spree

By Fuyuan Hsiao
From CommonWealth Magazine (vol. 418 )

Every day dozens of employees of the Mitac-Synnex Group, a Taiwanese conglomerate of more than 40 high-tech companies worldwide with a combined annual turnover in excess of NT$450 billion, fly back and forth between Taiwan and Silicon Valley on the U.S. West Coast. Many of these trans-Pacific commuters are financial officers and IT engineers in charge of hooking up newly acquired companies to the financial and IT systems at the group's Taiwan headquarters.

Within the past two years, the Mitac-Synnex Group has bought up more than 20 companies. Just two months ago group subsidiary Mitac International bought the consumer products division of Silicon Valley-based GPS device maker Magellan Navigation for NT$3.2 billion. With the deal the business group secured a 10-percent share of the U.S. market for handheld GPS devices and car navigation systems. On top of that, Mitac International took over Magellan's R&D teams in Silicon Valley and Russia.

Yue-teh Jang, general partner in renowned Silicon Valley venture capital firm The Vertical Group, likens Silicon Valley to a department store that is going out of business. "It's a good opportunity to go on a shopping spree," Jang declares.

Scrambling for Bargains

As a longtime Silicon Valley investor, Jang is deeply aware that Silicon Valley's most cutting-edge technology is usually to be found not in large corporations, but in small startup companies. Since the financial crisis hit Silicon Valley, venture capital funds have been shying away from further investments. Instead, large industry veterans such as Oracle and Cisco Systems have seized the opportunity to pick up promising companies at bargain prices, quietly yet actively pursuing mergers and acquisitions, Jang observes.

Just a month ago a buyer delegation from China came to Silicon Valley and inquired with Jang whether some of the companies in which he had invested were for sale. "They want to buy everything, no matter what it is," he says with undisguised amazement.

Not only the Mitac-Synnex Group is buying. Taiwanese display maker AU Optronics (AUO) also recently spent US$30 million on a 30-percent stake in SiPix Imaging, an electronic paper technology firm in Freemont, California. Taiwanese IT giants such as chip foundries TSMC and UMC and computer maker Acer are also busy expanding their investments in Silicon Valley through mergers and acquisitions or venture capital firms.

As much as 12 percent of all patents registered in the U.S. per year are filed in Silicon Valley. And Silicon Valley patents account for half of all patents registered in the state of California. Buying a Silicon Valley firm serves two objectives: first, obtaining new patents and technologies, and second, gaining greater market share and continued growth. Sometimes the only goal is to prevent competitors from snatching up the bargain themselves.

Tsai Ming-kai, chairman of Taiwanese chipmaker MediaTek, has long argued that being "first to scale" is more important than being first to market. Although the economic outlook is still uncertain, MediaTek is still buying up Silicon Valley companies and patents to strengthen its economies of scale.

One industry insider who looks back on a 30-year career in Silicon Valley reveals that Tsai travels to Silicon Valley every couple of months to negotiate mergers and acquisitions. "Honestly, MediaTek's merger and acquisition team must be even busier than their R&D team," he surmises.

AnnaLee Saxenian, dean of the UC Berkeley School of Information, once likened the present-day Taiwanese and Indian professionals who have taken the Silicon Valley entrepreneurial model back to their home countries to the Argonauts who sailed with mythical Greek hero Jason in quest of the Golden Fleece. As fortunes have shifted with the passing of time, these high-tech adventurers are now returning to Silicon Valley in search of the Golden Fleece that will allow their companies to spread their wings and fly high in the sky.

SpringSoft, Asia's leading EDA (Electronic Design Automation) solution provider and the No. 4 worldwide, is a classical example.

At Home in Hsinchu and Silicon Valley

SpringSoft, which was founded by Silicon Valley EDA pioneer Paul Huang, last year bought up five companies in one stroke, becoming a global company with a market value of more than US$200 million.

SpringSoft COO Johnson Teng frankly admits that he already knew when the company was founded in Hsinchu 13 years ago that it could not rely on the Taiwanese market alone. "It was clear that we needed to go for the global market," he recalls.

In order to attract high-tech professionals, SpringSoft founded sister company Novas Software in Silicon Valley, putting it in charge of local R&D and marketing. Last year SpringSoft merged with Novas and three other companies in which it had invested. In February it added to its fold Certess, a Silicon Valley-based company that has created a unique functional qualification software tool. All newly acquired companies will be integrated under the SpringSoft brand to create a global company well positioned to compete in the US$5 billion EDA market.

At the company's San Jose headquarters, the walls are covered with portraits of famous composers. As vice president of Logic Verification R&D, Yu-chin Hsu is in charge of SpringSoft's global R&D team. Sitting in the Vivaldi conference room, Hsu explains the unique structure of the company's R&D platform.

Hsu, who used to teach at National Tsing Hua University in Taiwan and the University of California, notes that under the conventional R&D model the Silicon Valley headquarters formulates product specifications and software architecture before outsourcing further work to R&D teams abroad. But at SpringSoft the R&D teams in the U.S. and abroad have been jointly involved in formulating the specifications from the very beginning.

The R&D teams in different areas get daily updates from the product manager regarding the latest market response. Every week the R&D headquarters in Silicon Valley holds videoconferences with the R&D teams in Hsinchu, Xiamen, Shanghai and Paris to discuss the R&D process and ensure a seamless connection between the market and R&D.

After buying a number of Silicon Valley companies, Taiwanese entrepreneurs have discovered that obtaining the Golden Fleece is only the first step in their M&A quest. The more important challenge from now on will be post-merger integration to ensure that the combined companies can continue to develop and grow stronger.

Synnex, the world's third largest IT distributor, is the most shining example of continued growth after a Taiwan-based company became its majority owner.

American Innovation Meets Asian Efficiency

Seventeen years ago MiTAC, led by chairman Matthew Miau, invested in computer distributor Compac Microelectronics. After MiTAC became its majority shareholder, the company was renamed Synnex Information Technology in 1994 and went public as Synnex Corporation in 2003.

Thanks to the integration of Synnex's distribution ability with MiTAC's prowess in manufacturing, assembly, and components, the company's annual turnover skyrocketed from an original US$80 million to US$8 billion last year, meaning a hundred-fold increase within 16 years. Meanwhile, Synnex has become the top IT distributor in the U.S., and was ranked 11th among Silicon Valley's top 150 enterprises by the San Jose Mercury News, ahead of industry stars Yahoo and AMD.

Miau, who only recently resigned as Synnex chairman, believes that the company's key to success is its "Asian connection." New Synnex CEO Kevin M. Murai, who is of Japanese descent, looks back on 19 years of experience in the IT distribution business.

Over the years Murai has observed that the company's Asian connection has greatly contributed to improving cost efficiency. Synnex has moved many of its operations – including its U.S. accounts receivable and accounts payable, its customer service center and its global maintenance center – to China, while its logistics office is in the Philippines. This is an example of an innovative business model that pairs Silicon Valley innovation with Asian efficiency.

For today's Silicon Valley, Taiwan also fulfills the dual functions of providing capital supply and technology outsourcing.

Two years ago R.C. Liang, chairman of Hsinchu-based solar cell provider DelSolar, decided to leave Silicon Valley and return to Taiwan. Having founded several companies in Silicon Valley, Liang observed that Taiwan is flush with capital and that quite a number of U.S. entrepreneurs have recently flown to the island to raise funds.

"Over the past days a lot of Silicon Valley companies have been asking us for money," says Liang with a satisfied smile.

Liang, who doubles as chief technical officer at Delta Electronics and holds more than 600 patents worldwide, says the technology gap between Silicon Valley and Taiwan has narrowed to one or two years, so that the longstanding model of Silicon Valley providing the architecture and Taiwan the design is starting to be reversed. Delta Electronics currently has a few product plans underway, for which the Taiwan-based company is developing the product concepts and outsourcing the technical side to Silicon Valley. When the completed product design is finally sent back to Taiwan, manufacturing of the new product will be handed to factories in China.

"Taiwan shouldn't be content with just being No. 2, following closely on the heels of Silicon Valley. We also need to learn how to be an industry leader," Liang asserts. He feels that Taiwan must be not only technologically independent, but also able to determine for itself what innovations the market wants.

Capital Raiser for the World's High-tech SMEs

Taiwan also has the potential to measure up to Silicon Valley when it comes to raising money in the capital markets for high-tech industry development.

Three years ago Wen Ko, chairman of Taiwan's largest venture capital firm WK Technology Fund, moved the company headquarters from Silicon Valley back to Taiwan. Although the fund makes half of its annual profits in Silicon Valley, Ko got increasingly frustrated over the exorbitant costs there, which make doing business three times more expensive than in Taiwan and more than five times more costly than in China.

As a result he convinced the companies in which he has invested to withdraw from Silicon Valley. Ko believes that now that Silicon Valley is wavering, Taiwan should muster greater ambition to become a "capital market platform for small and medium-sized high-tech enterprises around the world."

Ko makes a simple calculation: listing on the Nasdaq stock market will set a high-tech company back by several million U.S. dollars. On top of listing fees, companies still have to pay annual fees in the order of tens of thousands of U.S. dollars. Moreover, Nasdaq is the turf of large corporations, which makes it difficult for smaller companies to break through. Against this backdrop it is an excellent opportunity right now for attracting global technology startups to go public in Taiwan.

Jack J.T. Huang, an attorney at the Taipei office of international law firm Jones Day, is firmly convinced that Taiwan's stock market is the right stage for technology startups. Huang argues that price-to-earnings ratios are high for stocks listed on the Taipei Stock Exchange and that investors know the high-tech industry well. In mid-March, Huang decided to send a team to Silicon Valley to entice local startups to list on the Taiwan Stock Exchange.

Even in China there is no lack of startups who favor going public in Taiwan.

Forty-four-year-old Pengfei Zhang left his Silicon Valley career job four years ago to found his own company back home in China. With venture funding from Taiwan, Peng joined hands with two other returnee engineers to found Beken Corporation, a fabless design house for wireless applications, located in the Zhangjiang Hi-Tech Park in Shanghai's Pudong District. Two years after its founding, the company began to make money.

Having just arrived on a direct flight from China in the morning, Zhang spoke with CommonWealth Magazine after a whirlwind visit to his customers in Hsinchu. He frankly admits that going public in Taiwan is his first choice: "Where else in the world do stock market investors understand high-tech companies as well and have as much passion for them as in Taiwan?"

Zhang, who flies to Taiwan every few months, also asserts that "definitely quite a few" of the more than 7,000 professionals who have returned to the Zhangjiang Hi-Tech Park from Silicon Valley think along the same lines.

Silicon Valley is up for grabs. But amid the buyout frenzy, Miau, an old hand at mergers and acquisitions, warns against randomly picking up just any company. "You need to buy companies that are lean and mean," he insists. After all, buying a company just because it is cheap does not make business sense, if the deal is not able to generate synergy. On the contrary a company stands to lose more than it gains if it needs to spend a lot of money to deal with problems arising from ill-advised acquisitions.

Translated from the Chinese by Susanne Ganz


Chinese Version: 台灣大手筆併矽谷

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