I don't know if this article from the October issue of Worth has been posted here. Story about James Morgan by Michael Peltz. Of interest is that Capt. Morgan feels it will be a 35B industry by 2003 and AMAT will have over 1/3 of that total at 12B. In addition, he feels AMAT's stock price is undervalued. Great article and quite frankly my main concern is Morgan's age of 61. I hope AMAT doesn't have mandatory retirement at age 65! Jeff
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CEO
The Invisible Man
By Michael Peltz
You've never heard of him, but Applied Materials CEO James Morgan is one of the main architects of the microchip revolution
Few semiconductor analysts understand their field as well as Manoj Nadkarni. The MIT graduate spent 15 years as a process engineer with Advanced Micro Devices, National Semiconductor, and Matsushita Semiconductor before launching ChipInvestor.com this spring, a Web site devoted to providing unbiased research on semiconductor stocks. So when he holds forth on the chip industry's brightest luminaries, he knows what he's talking about. "Without a doubt,? he says, "the two most inçuential and important people in the semiconductor business during the past 30 years have been Andy Grove and Jim Morgan. These two gentlemen, especially Morgan, are in a league by themselves.?
Grove, the Hungarian-born engineer who drove Intel to its near-monopoly dominance of the PC microprocessor market, needs no introduction. The Intel chairman is famous for his intellect, his irascible perfectionism, and his wide streak of paranoia, which he wears as a badge of honor. But who is Jim Morgan?
The short answer is that James Morgan is the 61-year-old chairman and chief executive o*cer of Applied Materials, a company that, like Morgan himself, is well-known and respected within its industry and pretty darn obscure outside it. Applied Materials (Nasdaq: AMAT; recent price, $71) is the world's leading maker of semiconductor- manufacturing equipment. Or as company literature has it, "we make the systems that make the chips that make the products that change the world.? Morgan himself is a soft-spoken Midwesterner and onetime venture capitalist who has been CEO of Applied Materials since 1977. He's as smart and driven as Grove, but where the Intel chairman might talk of keeping his friends close and his enemies closer, conversation with Morgan inevitably swings to the importance of "mutual trust and respect,? "encouraging success,? and "focusing on our strengths.?
Usually, the only interesting thing about such phrases is the patent insincerity with which a CEO delivers them. But Morgan really means what he says. "He talks about mutual trust, mutual respect, things that everybody, even a child, knows,? says David Wang, Applied's senior vice president in charge of business and market development. "But he keeps saying this all the time. It's very sincere, not some kind of slogan.?
Morgan doesn't just talk, either. In mid-July, he camped out for three days at Applied Materials' booth during Semicon West, the semiconductor- equipment industry's annual trade show, meeting with customers, salespeople, and technicians from around the world. He was the only CEO of his stature to spend so much time at his company's booth. "I can get a whole lot done in a hurry,? he says. "It's one of my methods of what I call ?porpoising,' diving down into the business to stay close to what's really going on.? After Semicon, Morgan sent a letter to all 12,000 Applied employees, telling them about the compliments he had heard from customers during the trade show and thanking them for their efforts. "The employees read that over, and they feel good,? says Glen Toney, group vice president in charge of corporate affairs. "It's genuine, and employees know it's genuine.?
Morgan and Applied Materials are proof that paranoia isn't the only route to prosperity. Since 1977, when he was promoted to CEO, Morgan has delivered an average annualized rate of return of 36 percent to his shareholders (Morgan himself owns 1.8 million shares of Applied Materials, worth $128 million). That's even better than the 31 percent a year Intel returned from May 1987 to May 1998, Grove's tenure as CEO. No wonder the market assigns a far higher value to Applied Materials stock than to the stocks of its rival chip-equipment manufacturers (see the chart on page 71).
What that premium recognizes is Morgan's uncanny ability to anticipate shifts in a notoriously unpredictable business. A key instance occurred early in 1979. At a time when nearly all the world's chip making was concentrated in Silicon Valley, Morgan set up Applied Materials Japan, because he recognized that Japan was potentially the biggest export market for U.S. chip makers -- and their biggest rival.
Morgan's move was derided at the time, but earnings at the wholly owned subsidiary gave a big boost to Applied Materials throughout the 1980s. By 1989, Japan was making half of the world's integrated circuits. That year, Applied Materials Japan accounted for 40 percent of its parent's total revenue. Morgan's foresight continues to pay dividends to this day: Last year, Japan accounted for 17 percent of Applied's revenue, a figure that should improve now that the country finally seems to be emerging from its slump.
When Morgan joined Applied Materials as president in 1976, the company was nearly insolvent, having overextended itself into half a dozen technology businesses. Morgan quickly shuttered or spun off most of them to focus on semiconductor equipment, which accounted for half of its sales, then a mere $17 million. "I've always believed that you build on your strengths and work on your weaknesses over time,? Morgan says. "We had one piece of equipment, the Epi, that was our strength, so we focused on that.?
Epi refers to epitaxial deposition, the process by which a silicon crystal is grown on a bare silicon wafer to create a surface with a very high purity. (As many as 200 integrated circuits, or chips, can be carved from a single eight-inch wafer.) Following epitaxy, chip-making machines deposit layer after layer of materials -- conductors, insulators, or semiconductors. After each layer is put down, photolithography machines called steppers imprint circuit patterns. The circuitry is then etched in with special tools. Taken together, these repeated processes -- 250 to 300 steps involving epitaxy, materials deposition, photolithography, and etching -- are referred to as "the front end? of the chip-making process. Applied makes equipment for nine segments of the front-end market -- basically everything but steppers -- and it holds the dominant share in seven of them. It sells 73 percent of the deposition equipment for conductive metals and 56 percent for insulating materials.
The Epi may have saved Applied from the corporate dustbin, but the product that really put the company on the map was the Precision 5000. It revolutionized the entire semiconductor industry. Prior to the Precision 5000's introduction, in 1987, chips were made by moving batches of silicon wafers from one processing machine to another. The Precision 5000 reversed that approach, subjecting single wafers to several processes within the same machine. The great advantage of Applied's device was that only one wafer was wasted if an error occurred at any point in the process. With the older technology, one processing error could ruin an entire batch of 48 wafers, a costly proposition.
The Precision 5000 was also cost-effective. Its modular design allowed Applied to improve the product -- and introduce new ones -- without having to modify its main chip-making platform, a complex assemblage of robotics, computer systems, and vacuum environments. In March 1993, the very first Precision 5000 was inducted into the Smithsonian's permanent collection of Information Age technology, right alongside the first semiconductor chip.
During the next five years, Applied and other equipment makers should see a huge boost in sales from three waves of innovation. The first, which is already under way, is the move to smaller line widths, as circuits move from 0.25 microns -- about 1/200th the width of a human hair -- to 0.18 microns and smaller. Finer circuit widths increase the number of chips per wafer and allow chip makers to pack more functions on a single chip. "Because the chips are far more powerful, they're worth more,? says Morgan. But conductivity can suffer when line widths shrink, so chip makers will have to embrace the second technological wave, which Morgan calls "the materials revolution.? Copper is at the center of that revolution, because its electrical resistance is much lower than that of aluminum, now the primary conducting material in chips. Copper can carry more current in a smaller area, enabling faster, more powerful chips that use less electricity. By 2003, says Morgan, at least half the chips in the world could be made using copper.
Perhaps the biggest change will be the move to 12-inch wafers. Chip makers keep profits growing by continually driving down their cost per chip, and nothing will drive it down as fast as a 12-inch wafer, which can hold two and a half times more chips than its 8-inch counterpart. "It's the difference between a salad plate and a dinner plate,? says Morgan. "The equipment costs more, but chip makers should be able to reduce their overall production costs by about 30 percent.?
Applied and other equipment makers will welcome the pickup in sales the innovations will bring. In 1998, sales of machines used to turn silicon wafers into integrated circuits totaled just $14.7 billion, down 28 percent from $20.5 billion the previous year, as most chip makers dramatically cut capital spending. Applied nonetheless managed to pull in $4 billion in revenue in the fiscal year ended October 1998, down only slightly from its record $4.2 billion turnover in 1996 and more than double the revenue of its closest competitor, Tokyo Electron. Earnings didn't fare so well, falling from $600 million in 1996 to $231 million last year, in part because of a $285 million restructuring charge. Still, says Morgan, "downturns have actually been good for us in two aspects. They've enabled us to gain market share on our competitors as well as to strengthen the infrastructure of our corporation.? Even when business has been slow, Morgan has always insisted on plowing some 15 percent of Applied's revenue back into research and development. "In the early years, any place we could get a nickel we spent it on product,? he says. "Sometimes we spent over 20 percent of sales on R&D. There was some criticism, but of course, it paid off.?
The industry's latest slump appears to be nearing an end. According to Semiconductor Equipment and Materials International, the chip-making- equipment trade association, June marked the sixth consecutive month that the closely watched book-to-bill ratio was above one. At 1.24, the most recent book-to-bill figure means that for every $100 worth of chip- making equipment shipped in June, $124 in new orders was received. Technology research firm Dataquest predicts that 1999 equipment sales for wafer fabrication should be up slightly from last year and that by 2000 sales should return to the $20 billion level.
Morgan himself thinks total revenue for his industry will grow to $35 billion by 2003, driven by the proliferation of chips in everything from cellular phones to set-top boxes. Morgan expects Applied to capture as much as $12 billion of that total as it leverages the strength of its broad product line and extensive global-distribution and service capabilities. "It's like the pod-racing scene in the new Star Wars movie,? Morgan told an audience of institutional investors during his keynote address at a BancBoston Robertson Stephens semiconductor conference in San Francisco in late July. "Here we are in this little pod, powered with these enormous engines -- the Internet, E-commerce, games, new handheld computing devices -- all racing along. And our job is basically to hang on and try to maintain control as we rocket into the 21st century.?
With that sort of joyride in prospect, Morgan wonders when investors are going to value Applied Materials they way they do some of the market's other hot rods. Applied stock trades at 44 times estimated 1999 earnings of $1.61 per share -- not bad, but a far cry from AOL's multiple of 157 times 1999 earnings. "We think we kind of are a .com,? he says, "just nobody recognizes it. That's why we've always thought we were a little undervalued, on a relative basis. Whether it is Peapod, Amazon, Cisco, America Online, all this stuff is creating huge demand for chips, which we enable. Our key is to be sure we have significant market share in the processes that make chips possible, because someone is going to get that business, and we want it to be us.?
Michael Peltz is Worth's financial editor. |
