israelinvestor.com
Taking on the Taiwanese
Implications for Tower's Fab2
Mark Savolainen Smith 4/12/2000 09:15
By early 2002, if all goes according to plan, Tower Semiconductor will be ramping up commercial production in its new semiconductor facility (Fab2). If this increasingly likely scenario does play out, Tower as a business will be analyzed quite differently than it is today.
No longer a marginal enterprise dependent on an aging semiconductor plant, Tower, as a player in the state-of-the-art international foundry arena, will need to measure up to the top Asian fabs, particularly the Taiwanese. Tower's management has been planning for this move for years.
Competitors such as Taiwan Semiconductor Manufacturing Co. (TSM) and United Microelectronics Corp. currently have greater manufacturing capacity, more advanced technological capabilities, a more diverse and established customer base and a better cost structure than Tower.
Need Tower be intimidated? Not necessarily. Once Fab2 is functional, Tower will be, "ready to rumble." Its talented engineers and unique specialized technologies suggest that it will be able to compete successfully in its market niche with anyone in the world, even the Asians.
Motorola Foundry of the Year Award
Last month Tower received the Foundry of the Year Award from Motorola (MOT) for, to quote the company, "having demonstrated the ability to execute complex process and product transfers while maintaining outstanding cycle times and yields. Further, they [Tower] were judged to have provided world-class customer service and engineering organizations which allowed Motorola to transfer more than 15 complex mixed-signal devices into volume production, in record time."
Justifiably proud of this accomplishment, Dr. Nissan-Cohen, Tower's Co-Chief Executive Officer recently pointed to this award as proof that Tower's technical and design talent can compete (even with one hand tied behind their back)by saying, "We will not be shy about competing head to head with the Taiwanese just as even without having the most advanced technology, we were able to receive the foundry of the year award from Motorola..."
As the world's No.1 producer of embedded processors, Motorola uses many, many foundries, including those in the Far East, which have many advantages over Tower. Motorola's recognition of Tower's accomplishments should not be discounted.
The Motorola relationship is particularly significant for Tower in that Motorola was Tower's largest customer in 1999, accounting for 39% of total sales. As such Motorola must be near or at the top of the list of prospective strategic investors (who will also be customers) for Fab2.
It should be noted that Motorola is looking to independent foundries to outsource 50 percent of its manufacturing. Tower's Fab2 could well be made-to-order for Motorola's outsourcing strategy.
Specialized Technologies: CMOS Image Sensors and MicroFLASH
Tower has created its window of opportunity through years of strategic planning coupled with R&D. The basic idea is to differentiate Tower from its Asian competition by rapidly developing and implementing specialized technologies. Such technologies can be used to gain a competitive edge in terms of intellectual property and in the design of turn-key services.
Two such specialized technologies that could well tell the tale of Tower are CMOS image sensors and microFLASH.
CMOS image sensors are chips used in a variety of applications in digital photography, including PC cameras, digital cameras (both still and video), scanners, and medical applications. Tower has become an early leader in this emerging market, thanks to its CMOS technology, which is now replacing a competing technology known as CCD (charge coupled devices).
MicroFlash is Tower's name for Saifun's proprietary N-ROM technology. It is an embedded nonvolatile memory or embedded flash that retains stored data even after the power source has been removed or turned off. Cellular communications devices and other consumer products are creating a huge and growing demand for nonvolatile memory.
What could make microFLASH special is its size. If the technology proves itself, it will allow production of flash that is the smallest in the industry (up to 4 to 6 times smaller) which is a huge advantage.
Tower has certain exclusive manufacturing rights which will give it tremendous leverage in the market if microFLASH fulfills its theoretical potential.
Tower also owns 15% of Saifun, which is a private Israeli company. If it should go public the Saifun prospectus is now out for tender among underwriters), this 15% could be quite valuable, as some have speculated that a Saifun IPO could be in the billion dollar range.
A Valuation Comparable to the Asian Fabs
Once Fab2 is up and running, Tower will, if all goes according to plan, experience tremendous revenue growth. In 1999 Tower had sales of approximately $70 million. By the end of 2003, revenues could very well be in the $600 to $700 million range. This should have a very positive effect on how Tower is valued by the market.
Today the Asian fabs are traded in multipliers of market capitalization to revenue of about 15 to 30. If Tower is valued accordingly (and, with a state-of-the-art facility, it should be) and achieves revenues of $600 to $700 million, its market capitalization could be between $9 and $21 billion. For perspective, Tower's current market capitalization is less than $300 million.
To reach $21 billion, Tower's valuation would need to increase by a factor of 70. Such potential gains go a long way towards explaining rumors of large investors in Israel recently buying Tower stock.
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