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The Growth Story There is no hard-and-fast rule for determining a company's market valuation Technology may be good. Customer relationships may be solid. However, growth stories make or break a company's market valuation. Chip makers maintain a high profile by having products that serve consumer or industry end markets. Semiconductor production equipment companies and design automation software suppliers, once removed from the well-known chip makers, must rely on the power of their growth story to insure continued investment and market interest. For the top-tier gear makers like Applied Materials, Novellus Systems, KLA-Tencor or software suppliers like Cadence Design Systems, Synopsys and Mentor Graphics, market position is not assured; however, these companies have the critical mass to keep investors from ransacking them in the market. Smaller and mid-size equipment and software suppliers lack such luxury. According to analysts, a poor or even average quarter can derail fledgling gear and software makers in the market. In the electronic design automation (EDA) marketplace, Quickturn Design Systems took a hard hit in its March-ending quarter, and its stock never seemed to recover. While share price may not have been a determining factor for Mentor Graphics' unsolicited bid to buy out Quickturn (see story, page 1), Mentor's offer of $12.125 a share (a 50 percent premium on Quickturn's share price closing on the day before the bid was made public) did not exceed Quickturn's 52-week high of $16.313. In fact, Mentor's bid for Quickturn is 25.6 percent below Quickturn's high. Two weeks ago, Summit Design, another EDA supplier, watched 29.3 percent vanish from its share value (then $13.625) in one day, when the company revealed that it thinned its backlog to meet its numbers for the quarter (EN, Aug. 3). Summit has traded at roughly the $10 mark ever since the disclosure. Those At Risk? There is no hard-and-fast rule for determining a company's market valuation. Some methods compare cash on the balance sheet to a company's market capitalization (a cash-per-share ratio), while others rely on the strength of a company's technology and customer base versus its sales size. One method used by some analysts and investors compares a company's current share price versus its 52-week high (see chart, page 50). Those companies trading 30 percent below their 52-week high can be loosely considered undervalued--although the term raises hairs among executives and rarely is mentioned by analysts. Not all companies that fall into this category represent potential recipients of unsolicited bids or acquisition overtures. Etec Systems, for instance, is trading 49.5 percent below its 52-week high; however, the pattern generation equipment leader (with close to 75 percent market share) is not believed to be a possible target. ASM Lithography, the No. 2 lithography equipment supplier in the world, is trading 46.6 percent below its 52-week high, as well. Even smaller companies are at risk. Summit Design falls below the 30 percent threshold. On Oct. 10, the company hit its 52-week high of $18.125. Summit closed at $9.875 on Aug. 11, or 45.5 percent below its high. However, Summit remains on the radar screen of most analysts, despite few covering the fledgling EDA supplier. IKOS Systems, an EDA vendor, would also fall into this category. The company hit its 52-week high of $15.438 one year ago. The share price has eroded ever since, down to $2.531 on Aug. 11. The company is trading 83.6 percent below its high. IKOS supplies verification software and services, particularly logic emulation, and hardware accelerators for simulation. IKOS may not have a logical acquirer. Quickturn would give Mentor Graphics market leadership in the emulation space. Neither Cadence nor Synopsys are in the emulation market. Synopsys sold its emulation software to Quickturn. In terms of capital equipment, Applied Materials has a lot of cash on hand. $1.6 billion according to its third-quarter results. The cash-rich equipment leader also has the downturn to supply it with impetus to make acquisition moves. Applied made its name and its No. 1 market position from a reputation of strengthening in a downturn--a technique most companies now aspire to imitate. With a tough third quarter that saw new sales plummet to half the year-ago period, Applied could be hunting for a bargain. Ibis Technology Corp. is one name that might make it to some supplier's boardroom. If equipment companies take IBM's word for it--namely that silicon-on-insulator (SOI) technology could be a key part of all CMOS devices in the not-too-distant future starting in the first half of 1999--SOI gear and wafer suppliers could be hot property. Some companies may choose to spend the nine months to a year and $25 million developing their own tools from scratch. However, the two leaders in this field are small-size companies, Ibis--which most notably supplies IBM with SOI wafers and related equipment--and Soitec, a French company. The logical acquirers for Ibis would be Applied Materials, Eaton and ATMI, among others. Applied has been developing close ties with former Ibis CEO and current board member Geoffrey Ryding. Applied is funding development of ion implantation gear at Orion Equipment, the start-up of Drs. Ryding and Peter Rose. If Eaton acquired Ibis, it would be a reunion of sorts. Eaton made the first oxygen implantation systems, the NV-200 line; however, the equipment did not sell well enough at that time. Eaton pulled the plug on its efforts. Eaton researchers and some executives went on to form Ibis. Meanwhile, ATMI, a semiconductor materials company, has been aggressive in making strategic materials acquisitions in various niche, high-margin materials markets. While Ibis would represent a smaller fish, Lam Research constitutes a potentially larger prize. Lam took a $65.9 million or $1.72 per share net loss for the fourth quarter of 1998 on restructuring charges of $64 million. Although the company's cash position is strong--$397.2 million in cash and short-term investments at the quarter's end--fourth-quarter revenues dropped to $230.6 million from $282.6 million in 4Q97. Lam's fiscal 1998 was flat with fiscal 1997, and the company acknowledged that it does not expect business to improve for several quarters. Lam's share price, $17.6875, as of Thursday, Aug. 12, was 73.3 percent of its 52-week high, $66.313. Advanced Energy Industries controls 59 percent of the power conversion systems market, according to Lehman Brothers figures. If its proposed acquisition of RF Power Products (which has a 10 percent market share), the figure would near 70 percent. On Thursday, Aug. 13, AEI disclosed plans to restructure. The company said it would cut 128 jobs and close two of its six facilities in Fort Collins, Colo. Advanced Energy plans to take a $1.8 million charge in the third quarter. The company estimates revenues of $20 million for the third quarter and a net loss of 12-15 cents. The news sent AEI shares down further from $10 to $8.625 at Thursday's close. Compared with its $36.813 high, the price represents a 76.5 percent drop. Prior to AEI's restructuring, analysts have suggested that Advanced Energy is a company to watch. The company continues to remain the dominant player in its market, however the semiconductor downturn has put AEI in a squeeze. There are no logical acquirers, although Applied Materials and Lam Research accounted for 45 percent of AEI's sales. Semitool, which last week filed a patent infringement suit against Novellus Systems (see story, page 28), had a share price of $7.8125 at the Thursday, Aug. 13, close. The company may be hurt by a perception that its relationship to IBM's copper developments may not have been as close as first assumed, given Novellus and Big Blue's joint announcement at Semicon/West 98. At Thursday's close, Semitool was trading 70.9 percent below its 52-week high of $26.875. Despite the market valuation, analysts have said the Kalispell, Mont.-based tool supplier has sound technology. In Semitool's third-quarter statement, the company said it had $5.087 million in cash and cash equivalents and total assets of $132 million at quarter's end. Micrion, which has a leading position in focused ion beam systems; PRI Automation, a diversified factory automation supplier with a solid customer base; Brooks Automation, which supplies robotic subsystems for wafer processing equipment; and tester suppliers Credence Systems and LTX each represent solid companies with depressed stock prices (see chart, page 50) that have received positive statements from industry or financial analysts. There is no guarantee that any of the above companies could be a target for acquisition. However, as AlliedSignal/AMP and Mentor Graphics/Quickturn demonstrates, anything can happen, especially during a downturn as bad as this one. u |