Comparing Three Measures During Economic Downturns, A.T. Kearney Recommends Cash Generation Including Asset Sales for Semiconductor Companies

A.T. Kearney Inc. (Minato-ku, Tokyo, Representative in Japan: Takefumi Harigaya) has released a white paper on cash generation in the semiconductor industry titled "How Can Semiconductor Companies Generate Cash in a Down Cycle?"

This paper outlines measures for cash generation that semiconductor companies can take to secure sufficient working capital during an economic downturn and maintain the flexibility to act quickly during a recovery, as demand for high-priced electronics such as TVs and smartphones declines due to inflation.

Specifically, it compares three options: capital structure measures, operational reforms, and top-line growth, pointing out that recapitalization, including asset sales, can be particularly important for companies with high capital demands and requiring significant initial cash.

Comparing Three Measures, Asset Sales as an Option for Securing Initial Cash

As options for semiconductor companies to generate cash, this paper lists three: capital structure measures such as debt and equity issuance, operational reforms aimed at improving efficiency, and top-line growth through new products and technology licensing.

While debt and equity issuance can secure cash quickly, debt increases leverage ratios and equity dilutes ownership. Another option, the sale of facilities, factories, or business units, can take several forms, including outright sale, partial sale, or joint venture.

In the semiconductor industry, which holds many tangible assets, the sale of non-core assets can be a particularly promising measure. However, what is important during an economic downturn is to extract maximum value from the assets being sold, and the same perspective is necessary even when selling assets due to geopolitical risks.

Figure 1: Three Cash Generation Measures Semiconductor Companies Should Consider During Economic Downturns

Operational Reforms and Top-Line Growth Are Effective, But Take Time to Realize Cash

Operational reforms may reduce reliance on expensive capital investment through measures such as increasing production capacity by densifying dies, utilizing cheaper raw materials, and manufacturing innovations that improve yields.

Furthermore, leveraging relationships with back-end contract manufacturers to transfer some of the company's capital investment and working capital burden to partners in exchange for transaction volume and margins can be a means of generating cash while simultaneously pursuing strategic goals such as geographic diversification.

While top-line growth is the healthiest way to increase cash flow, actual improvements take time, and there is no guarantee that new products will always become profitable. Cost optimization also yields relatively predictable results, but it takes time to realize cash, making asset sales an important consideration for companies needing initial cash.

Maximizing Sale Value Requires a Combination of Five Data Points and Three Valuation Methods

The first step for companies considering asset sales is to collect comprehensive data on the assets to be sold. This paper presents five data areas using factories as an example: factory performance, market environment, intellectual property, management, and capabilities.

Income statements and, if possible, balance sheets on a factory-by-factory basis are useful for understanding profitability and financial health. Supply and demand trends, technological advancements, competitive environments, and geopolitical trends influence growth potential, while patents, trademarks, experienced management teams, factory scale, and the technologies used are also important factors in value assessment.

For valuation, it is recommended to cross-validate three methods: Discounted Cash Flow (DCF) analysis, multiples method, and asset-based valuation. Depending on the factory's condition, market environment, and available data, one method may serve as an anchor for the valuation range, while others provide complementary guidance.

Figure 2: Five Data Points and Three Valuation Methods to Collect for Maximizing Asset Sale Value

- About the White Paper

White Paper Title: "How Can Semiconductor Companies Generate Cash in a Down Cycle?"

URL: https://www.jp.kearney.com/issue-papers-perspectives/how-can-semiconductor-companies-generate-cash-in-a-down-cycle

- Supervisors

Kakuya Nishikawa, Senior Partner Graduated from the Faculty of Engineering, the University of Tokyo. After working at a patent firm, joined A.T. Kearney. Supports M&A strategies that create new demand by adding new technological axes to current technological axes, and creating new value (business models, operational models) leveraging IoT.

Kiyoshi Takei, Principal Completed MBA at MIT Sloan School of Management. Engaged in business strategy planning and alliance negotiations with overseas companies in the corporate planning department of Toshiba's semiconductor business (now Kioxia), then joined KEARNEY. Focuses on themes such as corporate strategy, business portfolio transformation, new business development, and M&A strategy, primarily in the telecommunications and high-tech fields. Capable of leading cross-border projects. Member of the Ministry of Economy, Trade and Industry's JAXA Committee.

About A.T. Kearney

A.T. Kearney (global brand name: Kearney) has been a trusted partner for over 100 years as a leading global management consulting firm, serving more than three-quarters of the Fortune Global 500 companies and government agencies worldwide. With offices in over 40 countries, our greatest strength lies in our people. Upholding the principle of "Impact, First," we tackle our clients' most difficult challenges with innovative thinking and execution, driving transformation together. We entered Japan in 1972 and have provided consistent support from strategy formulation to transformation execution for leading companies in all major industries. For more information, please visit our website. www.jp.kearney.com