Synopsys, Inc. (SNPS Quick QuoteSNPS - Free Report) is in talks to acquire the engineering software vendor, ANSYS, Inc. (ANSS Quick QuoteANSS - Free Report) , the Wall Street Journal reported last Friday. The Journal stated in its report that if the deal materializes, it could be the first big merger deal of 2024.

At last Friday’s closing price, ANSYS had a market capitalization of approximately $31 billion and that of Synopsys was $80 billion. However, the American business and economic-focused international daily newspaper said that the discussion could fall apart and another suiter could emerge.

We consider that the potential merger deal would mark a groundbreaking alliance in the realm of simulation software and semiconductor design. This proposed acquisition holds promises of mutual growth and amplified capabilities that could revolutionize the industries in which they operate.

Following the report, shares of ANSYS surged 18.1%, while Synopsys fell 6.3% on Friday. Year to date (YTD), SNPS stock has outperformed the Zacks Computer – Software industry, while ANSS has underperformed the same. SNPS, ANSS and the Zacks Computer – Software industry have rallied 64.2%, 48.1% and 55.5%, respectively, YTD.

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Does ANSYS Buyout Matter to Synopsys?

Synopsys is a vendor of electronic design automation software for the semiconductor and electronics industries. The company offers a full suite of products used in the logic synthesis and functional verification phases of chip design, including a broad array of reusable design building blocks. Meanwhile, ANSYS develops and globally markets engineering simulation software and services widely used by engineers, designers, researchers and students across a broad spectrum of industries and academia.

Therefore, the acquisition will fortify Synopsys’ simulation capabilities. The company could strengthen its semiconductor design solutions by integrating ANSYS' simulation technology. This collaboration might bolster chip design processes, ensuring higher efficiency and accuracy in testing and validation.

ANSYS' stronghold in engineering simulation solutions, combined with Synopsys' significant market presence in chip design, could open avenues for cross-selling. This synergy might enable Synopsys to penetrate deeper into semiconductor markets, fortifying its market position globally.

Furthermore, the merger would diversify Synopsys' revenue streams, reducing dependency on chip design tools. By venturing into the simulation software domain, Synopsys could capitalize on the growing demand for engineering simulation across industries.

Combining forces with ANSYS could render Synopsys a formidable force in the semiconductor and engineering simulation markets. This comprehensive offering could potentially outpace competitors, offering a one-stop-shop for semiconductor and product development needs. The acquisition could establish Synopsys in a leadership position, offering integrated solutions that address the intricate needs of modern technological advancements and positioning it as an industry trailblazer.

As talks loom over this potential acquisition, the convergence of ANSYS and Synopsys seems poised to redefine the landscape of simulation software and semiconductor design. If materialized, this amalgamation could pave the way for unprecedented innovation and market leadership, setting a new benchmark for tech synergy and industry growth.

Consolidation Continues in the Semiconductor Industry

The Semiconductor industry is undergoing a massive consolidation wave. A huge number of mergers and acquisitions (M&A) worth hundreds of billions of dollars have taken place over the last few years.

Consolidation is natural in a mature industry like semiconductor, which is now more than 60 years old. This industry is currently plagued with two huge challenges — the escalating costs of producing chips for devices and a sluggish growth rate.

With continued innovation over the decades, the size of chips has shrunk to that of a few atoms, while the costs of producing these have flared up. Moreover, rising costs for designing, packaging and testing are becoming unaffordable for most companies, especially for smaller firms. Additionally, the industry has been countering a declining sales challenge due to the supply-chain crisis following the pandemic and the Fed’s aggressive monetary policy to curb inflation, which negatively impacted demand.

In such a turbulent environment, semiconductor companies need to be huge to compete effectively. Therefore, these companies have resorted to M&A in an effort to grab more market share, cut costs, boost productivity and improve investment returns through scale economies.

One of the most monumental acquisitions in the space was the completion of the VMware acquisition by Broadcom (AVGO Quick QuoteAVGO - Free Report) in November 2023 in a deal worth $69 billion. VMware is a pioneer in virtualization software that consolidates applications and programs on a smaller number of servers and will help Broadcom tap the hybrid cloud market.

Prior to this, in May 2023, Qualcomm (QCOM Quick QuoteQCOM - Free Report) entered into a definitive agreement to buy Autotalks Ltd. — an Israel-based maker of chips used in crash-prevention technology in vehicles. The company intends to integrate Autotalk’s technology into its assisted and autonomous driving product.

M&A announcements generally result in a massive surge of the targeted company’s share prices, thereby providing investors with the opportunity to make huge money overnight. As the consolidation cycle for the semiconductor industry does not seem to end any time soon, it is wise to stay focused on stocks that could be potential takeover targets.

Synopsys, ANSYS, Broadcom and Qualcomm each carry a Zacks Rank #3 (Hold) at present. Shares of AVGO and QCOM have surged 100.7% and 30.5%, respectively, YTD. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.