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To: Philip W. Dunton, Jr who wrote (2640)	2/10/2000 8:16:00 AM
From: Philip W. Dunton, Jr	Read Replies (1) \| Respond to of 3661

From The Street.Com << SOX Hits the Stratosphere as Chip Sales Soar By Marcy Burstiner Senior Writer 2/9/00 5:21 PM ET SAN FRANCISCO -- It's a whole new world for chips, one fueled by the buildout of the Internet. A seemingly insatiable demand for personal computers, servers, networking equipment and phone and cable systems has created such demand for chips that revenues and stocks are at unprecedented levels. The Philadelphia Semiconductor Index, an indicator of the chip market's health that measures 16 semiconductor companies, is now in the 900 club, and technology analysts are waiting for it to hit 1000. "We are off to our strongest January ever," says Banc of America Securities analyst Rick Whittington. The SOX closed Tuesday at a high of 920.07, up 17 for the day. That's an increase of 215, or 30%, since the beginning of the year. The SOX is now at twice the level it was when it last peaked in 1997, and it's about five times the level it was at when the market bottomed Oct. 8, 1998. This is for a cyclical industry that almost all participants insist is still at the beginning of an up cycle, which may prove to be the longest that the industry has ever seen. (The index closed Wednesday down 16.55, or 1.8%, at 903.52.) With their sky-high valuations, chip companies are shopping at other companies for new technology; the frantic pace of development is forcing them to look outside for new designs instead of cooking them up in their own kitchens. Right now, chip sales have never been higher. The Semiconductor Industry Association this week announced that worldwide chip sales in December surged to $14.7 billion, an increase of 3% over November and 23% above December 1998. The industry ended the year with $149 billion in total chip sales, a new industry record, up 18.9% from 1998. That trend will continue, says Whittington, until the worldwide Internet infrastructure is completed. For much of the world, that prospect is still a long way off. Chip companies are racing to keep up. There has been a steady stream of chip acquisitions just since the beginning of the year. Lucent (LU:NYSE - news) bought parts of privately held component supplier VTC for $100 million; International Rectifier (IRF:NYSE - news) bought Zing Technologies for $28 million; Applied Materials (AMAT:Nasdaq - news) bought Etec Systems (ETEC:Nasdaq - news) for $1.8 billion; Taiwan Semiconductor Manufacturing (TSM:NYSE - news) bought Worldwide Semiconductor Manufacturing for between $5 billion and $8 billion, to name a few. Chip acquisitions were a rare event just two years ago. "It's because the demand for high-function, very integrated chips to sell into the latest and greatest Cisco (CSCO:Nasdaq - news) machine is so great, it is beyond the ability of any one company and any one supplier," says Banc of America's Whittington. So important is the need to add technology by acquisition, that a company like communications chipmaker LSI Logic (LSI:NYSE - news), which has made just three major acquisitions over the past two years, now has a department devoted solely to M&A. LSI shares hit a high of 100 Tuesday, a rise of 48% since Jan. 1. "I think everyone is eyeing everyone and saying, 'What do you have that I can't develop myself?' " says Bruce Entin, vice president of the Internet computing division at LSI. "It takes two years to develop a new chip, and no one can afford to do that." The semiconductor industry moves in multiyear cycles that rise and fall according to how fast chipmakers build new factories to meet ever-rising demand. When there is plenty of manufacturing capacity, prices for chips drop, revenue growth slows and companies delay expanding their factories. That leads to a tightening of supply, rising chip prices, sales growth and a rush to build, which leads to excess supply, falling chip prices and so on. But analysts say the development of the Internet may prolong this buildout cycle indefinitely. "The Internet has changed the rules," Entin adds. "It has created so much demand for semiconductor technology, that unit volumes are so high." Within this cyclical industry, a new cycle has developed, he says. Companies can't afford to develop in-house all the new technology needed, so engineers break off to form new ventures. These start-ups are generally single-purpose and are eventually bought. This generates new revenue, makes the larger company more competitive and fuels the share price, which provides more money for new acquisitions. And don't expect that cycle to end anytime soon. "It hasn't even started yet," says Whittington. >>