Novellus May Use Share-Sale Cash for Acquisitions, Analysts Say
San Jose, California, May 7 (Bloomberg) -- Novellus Systems Inc., whose tools build layers of circuits on computer chips, may use $488 million from a recent share sale for acquisitions to step up its challenge to Applied Materials Inc., analysts said.
Applied Materials, the No. 1 semiconductor-equipment maker, has stolen business from Novellus and other rivals as it adds products and enters new markets such as chip-patterning and polishing through purchases. Now, Novellus may start fighting back.
``They've recognized that Applied has so much momentum,'' said Mark FitzGerald, a Merrill Lynch & Co. analyst. Applied ``is not creating the technology in-house; they're doing the Cisco (Systems Inc.) strategy and buying from outside.''
FitzGerald said Novellus -- Applied's nearest competitor in key markets for tools that deposit the metals and insulators that build circuits -- holds a unique position in the industry. With relatively low operating costs and high levels of outsourcing, it's got more cash on hand to finance its expansion than many other companies.
Novellus spokesman Bob Climo declined to comment on acquisition plans, and the company has said only that it will spend cash from last month's sale of about 8.4 million shares at 59 5/8 each for general corporate purposes.
New Markets
Analysts say the company will have a tough time gaining ground with internal development alone. It could look outside to bolster its line of products for depositing metals and insulators or enter new areas like stripping and polishing away excess materials.
``If you want to be a leader, you've got to diversify into other market areas,'' said Mike O'Brien, an analyst at Wit SoundView. ``It's a good strategy.''
SpeedFam-IPEC Inc., which makes polishers, could be a possible acquisition candidate, said O'Brien. FitzGerald named stripping-tool supplier GaSonics International Corp. as another possibility. Lam Research Corp. also has long been considered a target, they said.
GaSonics President Asuri Raghavan said the company isn't in talks with anyone. SpeedFam-IPEC President Richard Faubert declined to comment, as did Lam spokeswoman Kathleen Bela.
Shares of San Jose, California-based Novellus, which have gained 58 percent this year, rose 7/16 to 64 7/16 on Friday. Applied shares rose 4 1/8 to 101 7/8 Friday and have climbed 61 percent in 2000.
Different Strategies
Turning to acquisitions for growth would be a departure for Novellus, which has made few purchases in recent years. Chairman and Chief Executive Rick Hill has long contended that bigger isn't always better and that improvement of company technologies brings in business.
The company's last significant acquisition -- the 1997 purchase of a Varian Associates Inc. unit -- gave Novellus physical vapor deposition machines, tools that place metallic layers on semiconductors, and almost doubled its share of that market.
Applied Materials takes a different approach, targeting areas it doesn't dominate and aggressively building up in those markets, often using acquisitions to gain business. The Santa Clara, California-based company uses its broad product line to win contracts over rivals because it can offer tools for almost the entire chip-manufacturing process, from depositing the first layer on the wafer to etching away excess material to polishing layers flat.
The company broke into the chip-inspection business with the purchase in 1996 of two Israeli companies, Opal Inc. and Orbot Instruments Ltd. In 1998, Applied bought software maker Consilium Inc. and in October acquired Obsidian Inc. to gain a new chip- polishing system.
Most recently, Applied Materials spent $2.8 billion to buy Etec Systems Inc., the biggest maker of tools used to draw the circuit patterns that get transferred onto chips.
Momentum
Though there's still solid growth coming from Novellus's internal development, Applied Material's momentum has made it such a tough competitor that acquisitions could be the fastest way to fight back, FitzGerald said.
``Applied is broadening its product portfolio faster than just about anyone right now,'' he said. ``In this business, there's definitely an advantage to having size.''
Indeed, the gap is sizable. Applied posted sales of $4.86 billion in fiscal 1999 -- eight times the $592.7 million that Novellus had last year.
Most chip-equipment companies are even smaller, and like Novellus, they focus on a narrow product line or two, winning business by aiming to be best in their specific areas.
Recent acquisitions in the industry have furthered that strategy. KLA-Tencor Corp., which competes with Applied Materials in some diagnostic-tool markets, has made purchases to build up its existing software division, rather than branching into new markets.
Adding more gear to deposit metals or insulators could boost Novellus's market share, O'Brien of Wit SoundView said. Novellus could go after small companies that don't have the resources to tap their potential.
More likely, though, are purchases in new, high-growth areas the company doesn't already compete in, analysts said.
Merrill's FitzGerald expects Novellus to consider technologies that strip away photoresist, the light-sensitive material used to transfer circuit designs to wafers. GaSonics builds those tools and is a current Novellus partner, making it a possible target, he said.
O'Brien said the company will evaluate chip-polishing tools, a faster-growth, higher-margin segment than its traditional deposition business. SpeedFam-IPEC, created in a merger between what had been the top two companies in that space, has fallen behind and could be a target, he said.
May/07/2000 10:57 GMT |
