Fairchild Semiconductor, Mother of All Chip Companies, Goes Public
By Marcy Burstiner
Staff Reporter
8/4/99 9:10 PM ET
SAN FRANCISCO --The recent euphoria for chip stocks was tested Wednesday
when Fairchild Semiconductor (FCS:NYSE), the mother of all Silicon
Valley companies, went public in one of the biggest semiconductor IPOs ever.
Fairchild closed the day at 18 3/4, or 1/4 above its offering price.
While hardly a stellar performance, the stock did manage to post a 1.4% gain,
which is more than can be said for most tech stocks Wednesday, not to
mention several dot-com IPOs this week. The Nasdaq Composite Index
closed down 1.8% and the Philadelphia Semiconductor Index down 1.2%.
Analysts were expecting a respectable IPO, not only because of
Fairchild's size but because it's coming in the early stages of a cyclical chip
recovery and in the midst of a huge chip rally. While the Nasdaq is up
16% this year, the SOX is up 39%.
If companies were valued on their past accomplishments rather than their
future potential, Fairchild would be a giant. The company gave birth to
the semiconductor industry in 1959 by inventing the manufacturing
process for chips -- the equivalent of Henry Ford figuring out how to make cars
via assembly line, an achievement that changed the industrial world.
More recently, Fairchild has been the Rodney Dangerfield of chipmakers.
Specializing in cheap commodity-like chips that tend to lose money
During industry downturns, Fairchild is a company whose history looks
Perennially more glorious than its future.
"People will suck Fairchild down like you won't believe," predicted CIBC
Oppenheimer analyst Ken Pearlman, whose firm is not acting as an
underwriter of the IPO. "People are willing to pay any amount for any
semiconductor company now. And they are willing to pay a premium for
size."
And, Pearlman added, investors can't help equating Fairchild with
Conexant ( CNXT:Nasdaq), which was a money loser inside Rockwell International (
ROK:NYSE), but has flourished ever since shares were first distributed
To Rockwell shareholders Dec. 9. Now a more focused communications chip
company, Conexant shares have risen 260% this year.
In its offering of 20 million shares priced at $18.50, Fairchild raised
$370 million, putting it second in size only to the $388 million raised
by electronic components maker AVX ( AVX:NYSE) in August 1995, which was
the largest single IPO of a chip-related company, according to Securities
Data.
Fairchild has had a rocky history. The company is probably best known
For letting go of engineers Gordon Moore, Bob Noyce and Andy Grove -- who
together founded Intel ( INTC:Nasdaq) in the late '60s. Since that time,
Fairchild has been passed around the technology industry like a
second-hand sofa, generally unwanted because of the dreary, low-margin
nature of its chips.
After that exodus, Fairchild languished for a decade until French
industrial giant Schlumberger ( SLB:NYSE) bought it in 1979 for $363
million. It then languished for another decade until Schlumberger tried
to sell 80% of the division to Fujitsu ( FJTSF:Nasdaq ADR), but the U.S.
government nixed the deal. Instead Schlumberger dumped Fairchild into
the lap of National Semiconductor ( NSM:NYSE) for a mere $122 million. At
National it was the forgotten stepchild until Citicorp Venture Capital
acquired it for $550 million.
This for a company that nurtured the people who now lead dozens of
companies in the technology world: Compaq ( CPQ:NYSE) CEO Michael
Capellas; Maxim Integrated Products ( MXIM:Nasdaq) CEO John Gifford;
Vitesse ( VTSS:Nasdaq) chairman Pierre Lamond; LSI Logic ( LSI:NYSE) CEO
Wilfred Corrigan; Advanced Micro Devices ( AMD:NYSE) CEO Jerry Sanders;
To name just a few.
Many of the alumni are glad to see Fairchild rise from the ashes of
obscurity. "It's very exciting, you have the Fairchild name reemerging,"
says Corrigan, who headed Fairchild before the sale to Schlumberger.
Exciting, perhaps, but Fairchild's area of specialty -- discrete
devices, or tiny chips that provide a single function and are used in such things
as hairdryers, wall thermostats, electronic car door keys -- are
low-priced commodities, about as dull as DRAMS. While Intel can get $200
for each of its microprocessors, Fairchild gets 20 cents.
Other companies in this field have been dogs of the sector: Microsemi (
MSCC:Nasdaq), for example, closed at 7 3/8 Tuesday, 65% off the all-time
high of 21 it hit in February 1998. And Integrated Device Technology (
IDTI:Nasdaq) has fluctuated wildly between 4 and 17 for the past two
years.
Still, while Fairchild's products are not as cutting edge as those made
By Intel or LSI, the market for those parts is consolidating, Corrigan
says. "There are fewer people competing for that piece of the market," he
says. "I think they will do quite well."
Citicorp's strategy has been to beef Fairchild up in size and diversify
its products. Through leveraged acquisitions, it bought two other
neglected chip divisions: One from Raytheon for $120 million in January
1998, and another from Samsung Electronics in April for $414.9 million.
As a result, the company is loaded down with debt. All the proceeds of the
offering will go to reducing the debt. And even then, Fairchild will
still owe $715 million to creditors, a four-to-one debt-to-equity ratio.
Fairchild plans to continue to grow through acquisitions. Drew Peck, an
analyst at S.G. Cowen, which isn't an underwriter of the IPO, said the
management has to find a way to push Fairchild into more profitable
product lines. "Fairchild has always been associated with the worst
cyclicality in the business," Peck says. "If you are buying the stock
you are making a bet that the management has a recipe for ending the
cyclicality."
But with the cycle on a strong upswing, Fairchild is entering the public
market at exactly the right time. "It would have been very difficult to
do a deal like this 1 1/2 years ago," Peck says. "We are in a period where
there are no real dogs in the semiconductor business. Things are
smoking. Even dogs have their day." home
|
