The Fitch Ratings have recently upgraded Microchip Technology from a BBB- to BBB, showing a positive outlook on its current debt situation. How did Microchip Technology get into $10bn of debt, what would happen if Microchip Technology went bust, and why should engineers concern themselves with financial markets and credit agencies?

How did Microchip Technology get into $10bn of debt?

Microchip Technology (shorthand, Microchip) is a well-known manufacturer and distributor of microcontrollers that have been used in almost every market, including medical, IoT, defence, automotive, and aerospace. Their long history and high popularity would suggest a decent cash flow with little debt and large profits (almost a “too big to fail” attitude). The multitude of acquisitions they have made would suggest stability.

And yet, the Fitch Ratings (credit rating agency) has recently upgraded Microchip from BBB- to BBB on the fact that they are keeping up with their repayments on an approximate $8bn debt. Now for anyone in debt, this is a good sign as it shows that whatever actions are being taken are working, but how on earth did Microchip get into debt in the first place?

In 2018, Microchip had a debt of around $3bn, which is typical for a large business with a long history of acquisitions and growth. However, in 2018, Microchip moved to acquire Microsemi for $10bn, whose value would have been taken on as debt.

But what caught Microchip by surprise after the acquisition in May 2018 was the many internal problems plaguing Microsemi. Firstly, it was quickly discovered that the internal culture of Microsemi was one of indulgence and extravagance with millions of dollars in sponsorships and luxury suites in stadiums and private plane travel and conferences. Secondly, it was discovered that just before the sale, Microsemi had maximised its sales channel with inventory that would make its revenue appear to be higher and thus increase the company’s valuation. However, this stock was being sold at discounted prices which inevitably hurt Microchip’s position.

Of course, Microchip did the best it could with a messy situation and nuked Microsemi from orbit with the removal of many of its staff, including the entire executive branch. The internal culture was changed, spending was cut, and Microchip has been able to steer the course of Microsemi into a positive future.

What would happen if Microchip went bust?

While Microchip has around $8bn in debt, the company won’t be disappearing anytime soon. The fact that the credit rating agency improved its score shows that whatever Microchip is doing, it’s doing it correctly. But this does leave us with a very interesting question; what would happen if it did go bust?

Microchip MCUs and other products are used extensively in all industries, and Microchip going bust would affect all of these. With so many engineers reliant on Microchip hardware, the inability to obtain Microchip parts would be out of the question. Competitors of Microchip would not be able to scale up production fast enough to meet the demand that Microchip parts meet, and the price of microcontrollers would skyrocket.

Of course, this all assumes that Microchip products stop being manufactured. When a company the size of Microchip goes bust, the business is broken up and sold by creditors to reclaim as much of the debt as possible. In the case of Microchip, its intellectual property and rights to the microcontrollers they have developed would be sold at a discount to a competitor such as STMicroelectronics, Renesas, or even ARM. This would see these companies not only have ownership of Microchip stock but also own any placed orders for new microcontrollers as well as those currently being manufactured.

Thus, the supply of Microchip parts wouldn’t stop but fall under a different brand. In this hypothetical scenario, Microchip has collapsed not because it is unpopular but because it cannot repay its debts for whatever reason. If Microchip failed simply because its market importance has fallen, then its collapse would be insignificant.

Why should engineers concern themselves with markets?

What makes engineering rather unique compared to the sciences is that while sciences are hyper-focused on a single field (such as quantum mechanics), engineering is concerned with the application of scientific principles and how systems interact. For example, an electronics engineer will have a scientific focus on electronics but also know the manufacturing process, the mechanical forces that a circuit may experience, how the environment will affect a circuit, and even the legality of the circuit.

But engineers often ignore financial markets, credit agencies, and political environments despite having a major effect on engineering. For example, the COVID lockdowns resulted in a massive disruption to the semiconductor supply chain that could have been easily avoided had manufacturers communicated with each other and set up long-term plans.

In the case of Microchip, an engineer could look at the credit rating and make long-term informed decisions about what future microcontrollers will be used in commercial devices. A company carrying lots of debt could become a liability if parts become unavailable, or a company deciding to expand into China may see restrictions in the future should a conflict between China and Taiwan happen.

Thus, engineers that prepare for the future by analysing financial reports and studying the political landscape could help to introduce long-term stability for their projects.