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No Buying Frenzy Yet
With stock prices off as much as 80%, acquisition scene is subdued so
far, but AlliedSignal-AMP, Mentor-Quickturn may be the start
By Carol Haber
AlliedSignal's hostile takeover bid for AMP, followed so closely by a
Mentor Graphics
run at Quickturn, has Wall Street's high-tech watchers wondering if at long
last the
corporate raiders are beginning to swarm.
Throughout this year, disappointing revenue reports have worked to deplete
the equity
reservoirs of many companies, ostensibly putting some of them "in play," but
other than a
handful of high-profile telecom mergers, acquiring companies have been
wary.
Companies like Atmel, Advanced Micro Devices, PRI Automation, Brooks
Automation,
Lam Research, Teradyne and Advanced Energy are all potentially attractive
targets,
according to financial analysts. Smaller analog companies like Telcom,
Semtech, Elantec
and Cherry Corp. could be alluring, as well as communications companies
like PMC-Sierra
or Level One, they say.
For that matter, National Semiconductor or International Rectifier could be
some other
company's cup of tea.
"I have no reason to believe there are any negotiations under way, or that
Atmel wants to
be sold given share price and longer term prospects, but with its excellent
management
team, Atmel could be a plum," said William Milton of Brown Brothers
Harriman. The San
Jose-based Atmel, with a substantial exposure to Asia, has "a small product
portfolio,"
making non-volatile memory, microcontrollers and ASICs.
Another "plum" might be Advanced Energy, which manufactures "smart"
power supplies.
The company's name was mentioned more than once. Analyst Sue Billat of
Robertson
Stephens noted: "They are very good at what they do." On Billerica,
Mass.-based PRI
Automation, she said "They have a very, very strong product lineup and
their stock has
been hit pretty hard."
Sector-wise, there are a number of smaller equipment companies struggling
to survive as
fabs are canceled or delayed. Many of them individually participate in part
of the
semiconductor manufacturing process, but could, in pairs or groups, provide
credible
broad-line threats to industry behemoth Applied Materials. Sectors such as
fab automation,
chemical mechanical planarization, and optical inspection are ripe for
consolidation, it was
said. At the same time, the now-fitful but inexorable march to 300mm has
always
demanded the sharing of huge amounts of resources, another reason to find
a mate or even
two.
There are small analog companies which could complement the offerings of
a Texas
Instruments or an STMicroelectronics, both sitting on mounds of cash; DSP
operations
which could enhance the breadth of an Analog Devices; independent GaAs
companies
which may be fodder for their own largest customers, Ericsson or Nokia;
and plenty of
startups and others who could provide the missing technology link for
companies touting
systems on a chip. The "idiosynchronicity" of making SOC lends itself to
outright
acquisitions rather than long-term internal development.
There are plenty of reasons to buy, so where are the buyers and why aren't
they biting?
Some analysts say the "wave" of acquisitions is brewing and will pick up
shortly, as
attempts at friendly negotiations continue. Others believe that the wider
business
environment is crimping plans, with the Asia financial crisis a loose cannon;
no
alternative in sight to the low-priced PC, which continues to batter parts
pricing; and the
devastating plunge in memory prices. Still others believe life goes on as
usual, with
companies mulling acquisitions at their usual pace in the knowledge that
"this is just a
cycle." In fact, stock prices notwithstanding, business as usual for
semiconductor industry
M&A has meant a tripling of transactions in the last two or three years,
according to
Michael Gumport of Lehman Brothers.
Memory companies on the whole are unattractive, analysts agreed, due to the
collapsing
price. Nevertheless, even here, a major customer might want to supply itself
with product
such as flash, it was said.
Is it the perfect time to buy, or not?
Industry outsiders may have the best shot now, suggested Tad LaFountain of
Needham and
Co.
Mr. LaFountain described two basic acquisition scenarios. "The most likely
situation is a
company which believes that by acquiring another's technology and facilities,
and merging
them with its own, it can significantly advance its own position, like the
TI-Micron
DRAM deal. The other is where an outsider believes that by going in and
applying
different management, it can enhance the returns from that company's
business. That
would be the AlliedSignal-AMP transaction.
"If you are an outsider, the fact that the stocks have gotten pretty cheap is
pretty
compelling. If you are an insider, your stock is probably pretty cheap too.
The question
then becomes, do you have the currency besides your own stock? On the
other hand, how
many outsiders have the stomach for the kind of volatility inherent in the
semiconductor
business?"
Mr. LaFountain continued: "I would think that normally in a downturn this
severe that a
purchase makes the most sense to an outsider whose own currency has not
been as badly
affected or not as directly threatened. One of the big problems is that every
time an
outsider has tried to acquire a semiconductor company, it has seldom
worked...the
semiconductor business is demanding, in terms of technology, customer
relations, product
life cycle, and capital intensity."
On the AlliedSignal bid for AMP, Mr. LaFountain noted that AMP is not
your typical
electronics company. "AMP is an electronics company but it is one of the
most industrial
and least electronic of any of the companies that we consider in the field.
Who is their
biggest customer segment? It may be automotive. It's one thing to be a
company selling
microcontrollers into automotive as well, but a connector is wiring. It
certainly seems
understandable that an outsider company, like AlliedSignal, an industrial
company, would
go after AMP. The product life cycles at AMP are a heck of a lot faster than
at an
industrial company but not as fast as in a semiconductor company."
Other financial analysts had this to say about stock market volatility and the
possibility of
an acquisition frenzy ahead.
At Brown Brothers Harriman, Mr. Milton, who covers large-cap companies,
doesn't expect
to see a surge in acquisitions, partly due to the fact that stock prices are
down for both
potential acquirers and acquirees. "In general, companies aren't in an
acquiring mode
unless their own operations are healthy. I think there is a real threat to
earnings from Asia
and slowing business in the U.S. and Europe." Mr. Milton expects
worldwide
semiconductor sales to be down about 11 percent this year versus last.
At Cowen & Co., Drew Peck said: "On the sector side, the clearest
candidates are those in
the analog business, fundamentally speaking. There may be other drawbacks,
such as
incompatible managements and difficulties in assimilation, but from a purely
business
perspective, these companies should be good candidates for consolidation.
They have very
thick product catalogs and their revenue growth to a great extent depends
on how many
products they add, whether through internal development or acquisition.
Those kinds of
companies have reasonably good technology but don't have the critical mass
of a Linear
Tech or Analog Devices."
Another possibility: "A back door public offer." With the prices of public
companies
lower, "one could imagine a situation where a private company might go
public by
acquiring a public company."
Acquiring minds might very likely include TI, he said, which "has made no
secret of the
fact that it will make strategic acquisitions...With the market having
depressed good
semiconductor names to much lower levels, presumably TI will be more
interested."
STMicroelectronics might be looking for a strategic buy. "They need a
mainstream DSP
product. They are one of the top two analog companies in the world, and
therefore buying
cheap analog companies might make good sense for them. STM would be
rather selective,
though, looking for specific pieces of technology," Mr. Peck noted.
Also mentioning TI was BT Alex Brown's Bruce Walicek. "Companies with
strong balance
sheets might be looking for acquisitions. TI could fall into that category
because of their
divestiture of businesses. Analog companies are a possibility but they haven't
made very
good acquisition targets because of the different process technologies
involved." Mr.
Walicek highlighted TI's networking chip business. "They might want to
expand that
portfolio," he remarked, adding that larger companies are also looking to
enhance their IP
portfolios.
At A.J. Edwards, analyst Chris Chaney said: "The first companies I think of
as likely
takeover targets are the memory companies; their prices have been beaten
down. If there is
a company out there that has DRAM and flash in its product lines...I would
think that
Atmel would be a takeover target because it has a big flash component in its
revenue." On
the other hand, Atmel has been acquiring companies to help its own SOC
position, he
pointed out.
Some smaller niche players in the cap equipment sector might find
themselves acquisition
candidates and unable to weather "a nine-month storm," Mr. Chaney said,
pointing to
small inspection and CMP companies. "There have been rumors that
Novellus, Lam and
IPAC would all come together....One company that might be an acquisition
target is
Straussbaugh, a small privately held but relatively large supplier of CMP
products." They
compete with SpeedFam, IPAC and Applied Materials. He noted that the
CMP business
"may not be around for long by itself," and might eventually be rolled into
larger
companies. In addition, to compete with Applied, companies will have to
team up or be
acquired, he pointed out.
Another group that might catch the eye of a giant are the specialty GaAs
companies, whose
products are heavily used in communications. Maybe Ericsson or Nokia,
major customers,
might want to pick one up cheap," Mr. Chaney said.
Mr. Chaney is surprised that STMicroelectronics has not been in more of an
acquisition
mode. Or IBM. "There are so many companies selling at 40-50 percent lower
than they
were 8-10 months ago. The whole industry is really hurting. I think they all
want to
preserve their own cash to weather what may be a longer than expected
down cycle...they
may not want to give away stock right now and they don't want to give
away cash
either."
According to Gunnar Miller, who covers equipment firms for Goldman
Sachs, there's no
big wave of acquisitions ahead in that area. While some transactions could
occur in fab
automation or ATE, "The number of logical candidates overall, in my
opinion, has gone
down. There are fewer tiny companies with very gee-whiz technology out
there now."
At the same time, "The very companies that you would expect to be out in
the market
making acquisitions, now that evaluations have been trampled, have not been
doing it, and
are more concerned with integrating their own operations."
The style of acquisition may be changing. "If any acquisitions are made, they
will be very
judicious on the part of the acquirer. The kind of M&A you are seeing more
and more of
isn't Varian buying Genus, it is Varian buying an element of Genus' product
line," Mr.
Miller said.
David Wu of ABN AMRO says good companies with beaten down stock
prices, like
Brooks Automation, Electroglas, or PRI Automation, are probably attractive
acquisition
candidates. "The acquirers would be companies in a similar business but
larger, who would
be looking to complete their portfolios. If a company wants to control
factory automation,
for instance, they should buy both Brooks and PRI."
But Mr. Wu isn't surprised at the slowness in the M&A scene in light of the
stock market
prices, so far. "Companies could still be negotiating a friendly
transaction...it takes time."
On the distribution side, Steven Ashley of Robert W. Baird said the
acquisitions could
start in three to six months and would happen "anywhere below the level of
the Arrows
and Avnets"--and below Marshall Industries, which is still digesting
Sterling. "I think the
business has gotten tough. Companies out there may be having a fresh look
at themselves.
The problem with a lot of these possible mergers is valuation; a lot of the
companies think
they're worth more. But when things get tough, companies are more open
minded. I think
you'll see some of the smaller public companies considering it." The perfect
example of
mid-sized distributors getting together: Reptron and All American.
Shelby Fleck, who covers passives and distributors for Morgan Stanley,
noted too that a
lot of stocks are close to their 52-week lows. "You can look across capacitor
companies,
PWB companies, compelling valuations, spotty track records on earnings.
Would they be
potential takeover candidates? You can't rule it out."
Economy or not, some companies have acquisitions tops on their agenda.
Fairchild Semiconductor, which manufactures commodity standard logic
(which "goes
around" system on a chip), has a strategy of "aggressive acquisitions." CFO
Joe Martin told
Electronic News, "...By far the majority of our growth mid-term and
long-term will come
via acquisitions. We feel there are a lot of companies that have components
that fit within
our strategy but which don't fit within their own long term strategies as a
SOC supplier."
Fairchild is looking at "a lot of properties" right now, and Mr. Martin says
that the
majority of his time is spent on analyzing potential properties. Fairchild is
seeking
acquisitions in the areas of logic, discretes, linear and non-volatile memory.
Are there good values out there? "It's a mixed bag," said Mr. Martin. "At a
lot of the
publicly traded companies that we would look at, their boards would not
allow somebody
to go in and acquire an operation at a low market value. Everybody knows
we are in a
cycle. For the boards to allow a property to be priced at the bottom of the
cycle and sold,
probably is not going to happen. On the other hand, there are private
companies out there
and divisions of companies that would be more sensitive to downturns in
the cycle, and
they might be more attractive because they don't strategically fit where they
are now."
The downturn helps in that companies tend to reassess their operations "and
see what
makes strategic sense and what doesn't," added Fairchild Darrell Mayeux,
senior VP, sales
and marketing.
At any rate, companies should be investigating mergers "in the classic sense"
rather than
buyouts, said Mr. LaFountain of Needham. They should be asking themselves
"who makes
a good partner for us, what are we missing that someone else has, rather
than basing a
decision on the financial markets." |
