M&A Outlook a Key Topic in Wall Street Transcript Semiconductor Equipment Issue
Tuesday September 27, 10:19 am ET
67 WALL STREET, New York--September 26, 2005--The Wall Street Transcript has just published its Semiconductor Equipment issue, a report offering a timely review of the sector to serious investors and industry executives. This 50 page feature contains 2 expert roundtable forums of leading industry analysts, and industry commentary through in-depth interviews with top management from 6 firms. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics include: Utilization rates, Business outlook Decline in capital intensity, Outlook for stock performance in 2006, Capital efficiency of 300mm tools, Industry adjustment to lower growth expectations, New technologies, Industry consolidation, New equipment companies in China, Cost cutting and restructuring measure, Transition in management approach, Investor concerns, Role of China in the marketplace, Outlook for lithography companies, Stock picks, Stocks to avoid.
Companies include: Applied Materials (AMAT); KLATencor (KLAC); Novellus Systems (NVLS); ASML Holdings (ASML); ATMI Inc (ATMI); Mattson Technology (MTSN); MEMC Electronic Materials (WFR); LAM Research (LRCX); Teradyne (TER); Intel (INTC); Cymer (CYMI); FormFactor (FORM); Fairchild semiconductor International INC (FCS); Entegris (ENTG); Taiwan Semiconductor (TSM); Cascade Microtech Inc (CSCD); AXT INC (AXTI). Analysts Include: Robert Maire, Needham & Company; John Pitzer, Credit Suisse First Boston; Edward White Jr., Lehman Brothers, Mark FitzGerald, Banc of America Securities; Steve O'Rourke, Deutsche Bank Securities and Ben Pang, Prudential Equity Group
In the following brief excerpt from the 50 page report, the roundtable panel discusses the prospects for consolidation in the sector, plus provides an outlook for investors.
TWST: John, is this slower growth environment going to lead to more M&A activity in the space?
Mr. Pitzer: Potentially. Historically, people have always overestimated the amount of M&A activity that should go on in this space. One of the things that people forget is that even though the entire industry looks pretty fragmented and Applied Materials, the largest company, is only about 22%-25% of the market, when you look at each subsegment in capital equipment and each product line, there are already two players that dominate that space with about 80%-90% market share. So for consolidation to happen, it has to be somewhat cross product, which is a little more difficult to do. I do think that M&A activity has picked up of late. We've seen several publicly announced transactions. One of the things that's helping that is during this last downturn, a lot of the Founders and CEOs of these smaller companies retired. New CEOs came in who didn't look at the business as emotionally as some of these Founders did. They were looking at it from a much more economic bent, and I think that is helping some consolidation.
In addition, if your core markets are swelling, you'd better find other avenues of growth. I think you've seen that with Novellus getting into other segments. You've seen that with Applied trying to make a bigger push into the metrology market, and even LAM Research, which has done a fantastic job in the etch market and has been gaining share over the last couple of years, is now talking about bringing out a clean tool to help augment top-line growth.
TWST: Robert, what's your view? Are we going to see more M&A?
Mr. Maire: Yes and no. I don't think it is going to necessarily be driven by M&A because of slower growth in the industry. You are seeing a lot of companies looking to get together or to do acquisitions for critical mass. This industry has always had an issue in terms of its global reach, and it's certainly become more global than it ever was with a huge percentage of the business being done out of Asia. There's a minimal critical mass in terms of hundreds of millions of dollars a year of business that you have to do in order to be an efficient participant in this industry. Certainly you can participate in this industry if you're a $50 million a year company, but it's hard to have service people in every part of the world like AMAT does or other large companies that have a whole bunch of service people standing by playing repairman. So critical mass is an issue of a global industry.
As John alluded to, they are looking for new opportunities. Unfortunately, most of those combinations of large companies buying smaller companies, Novellus as the example, haven't really worked all that well. Novellus went into the circuit business by buying a company called Gasonics International, but that hasn't done very well. They've lost a lot of share there. Likewise in the CMP business, it did not do very well in acquiring SpeedFam-IPEC.
The kind of M&A we're seeing right now is not larger companies buying smaller companies, but smaller companies banding together or looking to bulk up and become more competitive against the larger companies. That's probably what we'll continue to see. Most of the M&A activity we've seen lately has been companies buying companies that are similar or related; These acquisitions are viewed as synergistic rather than something totally in another realm. It's a combination of scale and synergistic product lines that people are looking for.
TWST: Robert, what are you telling investors to do?
Mr. Maire: Rather than specific stocks, in general I would tend to shy away from some of the standard wafer fabrication companies. I would perhaps focus a little more on the yield management, process management, metrology-oriented companies. I would bias myself that way.
The other way I would bias myself is perhaps away from large cap and toward small cap because I think there are a lot more opportunities on the small cap side for growth. A lot of the small cap companies got hurt a lot more at the bottom of the cycle. Some examples of small caps that are gaining share and looking a little better include Mattson Technology (MTSN) and Semitool (SMTL). These are two relatively small cap names that have sort of been forgotten about in the down cycle that could have some upside.
Although I'm positive on AMAT, LAM and Novellus, I don't think they're going to have quite the growth. It's probably going to be more difficult to make money there. I do like the yield management and metrology side. The leader in that is, of course, KLA, which we haven't talked about very much here. But they've certainly done a fantastic job, probably the best of any company in the space during the downturn in terms of profitability and maintaining business levels. There are some small cap equivalents in the KLA space that might be worth looking into. Again, I have a bias toward the metrology, measurement, yield management and quality control issues.
In the near term, if I were a short-term trading type of house, I might look to the back end assembly and test sector, which has seen some nice pops in orders. You may see some near-term growth beyond the rest of the industry there.
TWST: Ed, how about you? What are you telling people to do?
Mr. White: I like the prospects for recovery and I think it is a good time to be invested in semiconductor capital equipment. I also think it is a good time to focus on specific stocks and to focus on names for the specific things that are going on within each company as opposed to buying everything within the group. There have been times in the past when the rising tide lifted all ships, but I think now is a good time to focus in on things that are going on in individual companies.
On Applied Materials, investor sentiment has been fairly cautious, because it is the leader in the industry and concerns about long-term growth have certainly affected the stock. But I think they have a far better strategy than is generally appreciated, especially on the service side, where I see the opportunity for them to leverage high value added services in order to support the sale of hardware products of increasing levels of technology. The services have really become not only revenue generators on their own, but they make it possible for semiconductor manufacturers to cost effectively take advantage of equipment of substantially greater complexity than we have seen before.
At KLA-Tencor, the real opportunity is to continue to help improve the yield management process in semiconductor production. When considering technologies like 65nm and the development work at 45nm, it is critical to have a good understanding of what's happening at the level of the wafer. I think KLA-Tencor continues to have some extraordinary capability and background that it can bring to that task.
Finally, to participate in some of the very short-term trends that are likely to occur in packaging and test, I think Kulicke & Soffa (KLIC) is interesting. The company has perhaps the most substantial upside manufacturing leverage of any company in the industry in terms of being able to ramp from a fairly low level of units to a very high level in a short period of time without adding a lot of cost.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 50-page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
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