IBD article entitled, "Chip Equipment Makers Go On Weight-Gain Plan" (in 10 Jun 97 copy on page A6)
The chip downturn left some equipment makers bruised. They're making themselves feel better with a little shopping.
Chipmakers continue to try to pack more features into smaller spaces, and they're willing to spend on research and development to do it. To help them get the most bang for their bucks, chip firms want their equipment suppliers to be more than just niche players, say analysts.
Equipment firms are happy to oblige. Last month, two major equipment makers - KLA Instruments and Tencor Instruments - finalized their stock-swap merger and became KLA-Tencor Corp. Based on '96 sales, the combined San Jose, Calif.-based firm had revenue of more than $1 billion.
Also last month, San Jose, Calif.- based Novellus Systems Inc. announced it is buying the thin- film business of Varian Associates Inc. of Palo Alto, Calif., for $150 million in cash.
By making these deals, these firms are broadening their markets. And they hope growing their girth will help them ride out future slowdowns.
The chip equipment market was worth $21.6 billion last year, according to research firm Dataquest Inc. of San Jose, Calif. Applied Materials Inc., based in Sunnyvale, Calif., was No. 1, with Japanese companies Tokyo Electronics Ltd. and Nikon Corp. holding the second and third slots, respectively.
With $611 million in '96 revenue, KLA was in ninth place. Tencor was 10th with $348 million in '96 revenue, says Ronald Dornseif, a Dataquest analyst.
Despite rosy predictions a few years ago that the chip industry would stop its roller-coaster ride, ups and downs are endemic. And only so many companies can survive and still invest in critical research and development, says Fred Zieber, an analyst with Pathfinder Research Inc. in San Jose, Calif.
''Every time you get a down cycle, you lose a bunch of the little guys,'' Zieber said. ''There's not much you can do but grit your teeth. The KLA-Tencor merger is part of a trend of consolidation with the equipment makers. So basically, what you'll have is one big company that will dominate its market.''
The recent activity from the bigger firms could hit the niche businesses. ''It's definitely going to increase the competitive hurdles for smaller players,'' said Brett Hodess, a financial analyst with Montgomery Securities in San Francisco.
Industry leader Applied spurred the recent spending spree. In January, Applied bought two companies - Opal Inc. and Orbot Instruments Ltd. - for a total of $285 million in cash.
In doing so, Applied took aim at KLA-Tencor's market of wafer yield management and process control systems. Novellus also is pushing back advances from Applied with its Varian buy.
The KLA-Tencor merger and Novellus' Varian buy received kudos from analysts.
''For the industry, (KLA-Tencor) is good because it presents another strong player,'' said Jim Feldhan, president of research firm Semico Research Corp. in Phoenix.
''I know customers have often wanted KLA and Tencor to work closer together,'' said G. Dan Hutcheson, president of VLSI Research Inc. in San Jose, Calif.
But even with all the potential advantages, it's no easy feat to pull two companies together.
''The biggest question is, can (these companies) pull it off while maintaining the focus they had before?'' Hutcheson said.
About half of mergers fail, he notes, citing a VLSI study. Only 7% of companies were better off before an acquisition, while 45% were worse off and the rest showed little change, Hutcheson says.
In the same industry, company cultures still clash.
KLA uses optical imaging to inspect wafers, while Tencor uses a laser-based inspection system. ''So you've probably got some engineers that have ideological differences,'' Montgomery's Hodess said. ''But it can be handled.''
Customers may stand to benefit the most from the equipment-maker marriages.
''KLA and Tencor's products are pretty synergistic,'' said Hodess. ''There's not a lot of overlap. As long as they don't think KLA and Tencor are gouging them on margins . . . customers should be receptive.''
Novellus may give Varian's division a boost. Varian was a pioneer of chip equipment technology, but also does business in the medical field. Chipmakers prefer pure-play companies. So, the Varian division should do better as part of Novellus, Dornseif reasons.
For its part, Novellus did well in buying Varian's thin-film division, Semico's Feldhan says. ''I think it's good for Novellus in that it broadens their product line,'' he added.
The next round of buys could happen in the chemical mechanical polishing, or CMP, arena. This is a process in which chemicals are used to polish wafers - earlier systems relied on just mechanical polishing. There are plenty of small, private companies selling this equipment.
''Over time, those companies will align themselves with larger companies,'' Dataquest's Dornseif predicted.
KLA-Tencor is still on the hunt. ''I don't think we'll rule out anything,'' said Jon Tompkins, the firm's chief executive. ''We have a mission of being a major player. We will do what it takes.''
And what it takes is thinking small - 0.25 micron and less to be exact. The move by chipmakers to smaller geometries - tighter transistors - is squeezing equipment firms to develop products with greater precision.
''I think that any time we go through one of these inflection points . . . it's at least twice as hard or 10 times as hard to meet the technical requirements,'' Tompkins said. ''For us, the main challenge is to meet 0.18 micron, which is the next manufacturing milestone.''
While chip features are shrinking, wafers are expanding. The next step is 300-millimeter wafers. The bigger the wafer, the more chips can be cut from it.
Chipmakers will begin producing 300-millimeter wafers late this year or early next, Tompkins predicts.
''That's going to require a whole new army of inspection and measurement equipment,'' Montgomery's Hodess noted.
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Copyright (c) 1997 Investors Business Daily, All rights reserved.
Investor's Business Daily - Computers & Technology (06/10/97)
Chip Equipment Makers Go On Weight-Gain Plan
By Michele Hostetler |
