Infineon buys Wolfspeed - is the US DoD losing a strategic supplier of GaN RF technology?

Infineon will buy Wolfspeed for $850 million. The acquisition provides a lucrative exit for Wolfspeed’s parent company Cree and allows Infineon to add GaN capability to its commercial RF power portfolio. But what does this mean for the US DoD when a foreign company buys a Category 1A Trusted Foundry facility with DoD manufacturing readiness level eight (MRL 8) designation?

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.

• The deal will be financed through $720 million in bank loans and $130 million cash-on-hand and is expected to close by the end of calendar 2016.
• Cree reported third quarter fiscal revenues (ended March 2016) for the Wolfspeed Power and RF Products business of $29 million, up 6% sequentially. Gross profit/margin for the business was down 6% at $13 million or 46.4% with the company earnings call transcript citing an unfavourable product mix.
• Total revenues for the 12 month period ending March 2016 were $117 million for the Power and RF Products business. Infineon cites revenues of $173 million; we assume the delta in revenue is associated with the perceived value of the SiC wafer substrate business; this activity is not disclosed in Cree’s quarterly transcripts.
• Infineon cites an expected gross margin of 55% although trends based on the reported Power and RF Products business gross margins point towards lower profitability. As noted above, the quarterly earnings do not disclose information related to the SiC wafer substrate business.

The acquisition provides a lucrative exit for Wolfspeed’s parent company Cree, following a somewhat tepid market reception for a planned IPO of the spinout, and allows the company to continue building momentum behind a transition to becoming a more focused LED lighting company. The acquisition allows Infineon to build on its power electronics technology portfolio through Wolfspeed’s SiC-based products and complements the International Rectifier acquisition in 2015.

On the RF front, Infineon has been slow in acknowledging the swing towards compound semiconductor technologies for commercial wireless infrastructure applications so this brings Infineon in-line with offerings from competitors such as NXP and Ampleon by adding GaN capability to its commercial RF power portfolio. Infineon is targeting wireless infrastructure for next generation 5G and IoT networks citing the critical role that compound semiconductors will play in delivering the necessary performance especially at millimetre-wave frequencies.

The defense industry was the original driving force behind the development and maturation of the RF GaN supply chain. GaN has become the power technology of choice as new platforms enter development and some existing platforms undergo major capability upgrades. There is also development activity aimed at low power functions using GaN because of the system and cost advantages that a GaN solution offers. The need for wider bandwidth, higher frequency and higher performance characteristics will drive growth across defense applications including radar, EW and communications, with the radar segment accounting for the largest end-use of GaN devices in defense applications.

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 so the implications of a foreign company buying Wolfspeed will no doubt raise concerns and Infineon may need to consider strategic options for this side of the business if the deal is to close as planned by the end of 2016.