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Technology Stocks : Teradyne -- Ignore unavailable to you. Want to Upgrade?

To: Short A. Few who wrote (1079)	9/15/2000 9:24:42 PM
From: Maverick	Read Replies (1) \| Respond to of 1184

ML:TER spins-out Empirix;investors buy CS at 70% discount Excerpts fr Merrill Lynch follow 9/6 Investment Highlights: • Teradyne announced it would consolidate its software test units into a single company to be named Empirix. Employees, along with an investors group lead by Matrix Partners, will own a controlling interest in the company. • The transaction is expected to close by the end of the year. The terms were not disclosed, but there should be no material impact on Teradyne’s financial model. • As a separate company, Empirix should be able to focus on its hyper-growth software test market. • Maintain Buy rating and $110 price target. Fundamental Highlights: • Teradyne is the leading manufacturer of automatic test equipment (ATE) serving the electronics industry. The main product lines include semiconductor, circuit board, and telecom infrastructure test equipment, and software testing. Teradyne is also a leading Electronics Contract Manufacturer. Creation of Empirix a Positive for Teradyne Teradyne announced its plans to consolidate its software test units into a single independent company. The name of the new firm will be Empirix. Employees, along with an investor group lead by Martix Partners, will own a controlling interest in the company. Teradyne will retain an ownership position in the company. The transaction is subject to a number of closing conditions, including regulatory approvals. The company expects the transaction to close at year-end. There is no expected impact on Teradyne’s financial model. Empirix can focus, focus, focus As a separate company, Empirix will be able to focus its complete attention on the hyper-growth software test market. The RSW Software unit currently specializes in e-business application testing software. The company’s e-TEST suite was voted Overall Favorite Product of the Year and the Reader’s Pick in the Development Tool category by InfoWorld magazine readers in 1999. We believe the change in structure is based on the overall size of the business (software testing <5% of revenue) and the technology for a software company was diverging from Teradyne’s core hardware businesses of Semiconductor Test and Backplane, Connector manufacturing. As a separate company, Empirix will be able to use its stock as currency for the attraction and retention of key software employees. The company will have of hundreds of customers in financial services, communications, retail, and e-commerce. Current major customers include British Telecom, People's Bank, Countrywide Home Loans, MCI Worldcom, Sprint PCS and a host of leading dot-com entities. Investment Opinion Maintain BUY and price target of $110. We believe the stock should regain a valuation in-line with Applied Materials and KLA-Tencor as the leaders in their respective segments at 25-30x 2001 EPS estimates. Thus, our price target is $110, based on our 2001 estimate of $4.00. We note that we believe our valuation analysis is very conservative. We estimate that 20% of our $4.00 EPS will come from contract manufacturing (Connection Systems) were the closest comparable is Sanmina. If we value this portion of the EPS at 50x like Sanmina, that yields a $40 price. The remaining $3.20 even at only 20x 2001, yields $64. Thus, the sum of the parts valuation is $104. This is nearly our price target even with a very low P/E on the semiconductor equipment portion. Another way to look at it is that investors are buying the Connection Systems business at a 70% discount at the current price level. Lastly, the management is showing its desire to unlock shareholder value. The proactive change in structure for the software testing unit should allow the hidden value of this unit to be discovered. Teradyne is the leading global manufacturer of automatic test equipment (ATE) serving the electronics industry. Semiconductor test equipment represents roughly 65% of sales. Teradyne holds 25% worldwide market share. Teradyne is the only company with a dominant (top 1 or 2) position in all three semiconductor test segments; Logic, Memory, Mixed-Signal. Teradyne is also a leading manufacturer of backlplanes, high performance connectors for electronic systems, printed circuit boards and software test products.