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To Acquire or Be Acquired? Small gear makers grapple with the hurdles of a global market St. Petersburg, Fla.-- Could the other shoe be dropping? Or is it a white glove? While the leading gear makers continue to cut back and dig in for a long 1999, consider KLA-Tencor's plans to cut 5 percent of its worldwide workforce, the multitude of equipment companies must cope with being $50 million or less in size, in a $1 billion-plus-per player world. Consolidation looks to be the rule as opposed to the exception for the remainder of 1998 and into 1999. Not that this expansion and contraction in a market is anything new, however, more than 2,000 Semiconductor Equipment and Materials International (SEMI) member companies fall in the $20-$30 million revenue range. With fewer fab projects, global infrastructure needs and lack of investment capital, there is no room for error among the point tool providers. In recent weeks, consolidation swept over the manufacturing execution (MES) system space with Brooks agreeing to buy FASTech Integration and Applied buying Consilium. Promis Systems has negotiating with potential suitors as well (see this week's Fab Line column). Two weeks ago, Fairchild Corp. bought a 7.06 percent stake in Watkins-Johnson (EN, Nov. 2) and alluded to possible merger plans. Meanwhile, Plasma-Therm last week retained a full-service global investment bank as exclusive financial advisor relating to all acquisition activities. The institution, a subsidiary of a large bank, requested that the company not reveal its name. Plasma-Therm has eyed the data storage (the manufacture of thin-film heads for disk drives) market in particular as an area for acquisition growth in the plasma-based technologies sector. Like the MES market, which, according to the estimate of an IBM executive at Semicon/West 98, contained 37 small players slugging it out for a small market. "Only one company is doing (thin-film head manufacturing) at front-end and that is Veeco Instruments," says Scott Deferrari, president/CEO of Plasma-Therm. Veeco, a roughly $250 million company, primarily deals in metrology systems with roughly $50 million in business coming plasma-based technology space. Within this space, more than a half dozen small private companies with revenues in the $35-$65 million range carve up the data storage equipment market share. Plasma-Therm plans to fold several of these companies under one tent, its own. Mr. Deferrari point to Shimadzu's recent purchase of Nordiko Instruments as a transaction much like the ones Plasma-Therm has identified. "There are probably five left between $35-65 million." According to Mr. Deferrari, Plasma-Therm has set its sights on these five companies particularly in the physical vapor deposition and ion beam etching, ion beam depositions areas. "We have a semiconductor downturn, but we also have a credit crunch," says Mr. Deferrari, referring generally to the distance growing between the equity markets and equipment vendors. In recent weeks, the volatility of the equity markets has been the subject of consternation regarding gear makers. IPOs have been DOA for months. In a recent issue of its monthly newsletter, Infrastructure, a market research and consulting firm, lamented that capital would be more and more difficult to obtain by equipment companies. Sue Billat, principal of BancBoston Robertson Stephens, does subscribe to capital being as big an issue as economies of scale and weakness on the balance sheet. According to Ms. Billat, the IPO situation will pass with time, however, economies of scale are growing and chip makers want a more complete solution from their suppliers, Ms. Billat asserts. These factors necessitate larger equipment suppliers. Chip makers, Ms. Billat, express some reluctance on "betting a fab on a company that might not have staying power. While chip makers will buy from a smaller company, the burden of proof is on the smaller company." In some cases, Ms. Billat believes that chip makers serve as matchmakers pairing a smaller company holding technology important to its business with one of their larger equipment suppliers. Regardless of how, equipment companies weathering the downturn reasonably well are in a position to buy smaller companies struggling with these issues. In the case of Plasma-Therm, according to Mr. Deferrari, the company has enjoyed 20 percent revenue growth this year, primarily due to its insulation from the semiconductor industry. "The downturn coupled with credit tightness will allow us to buy these companies at a reasonable price," says Mr. Deferrari. Veeco and Balzers Process Systems are Plasma-Therm's only competitors in this market, says Mr. Deferrari, with the latter traditionally relying on internally developed systems. Within the next six months, Plasma-Therm expects to complete some acquisition agreements. The St. Petersburg, Fla.-based company has entered into active negotiations with two unidentified companies. As part of the agreement revealed last week, Plasma-Therm's unnamed financial partner will begin discussions with three other companies on Plasma-Therm's behalf. "We are looking to purchase whole organizations, process technologies or product lines," says Mr. Deferrari While Plasma-Therm has eyed five companies, "some are mutually exclusive," says Mr. Deferrari, "I can see us having three of the five. We have an 'A' choice and a 'B' choice in each category. They are arbitrary at this point; after we do a little exploring, we might change that." After its strategy is executed, Plasma-Therm expects to be more of a "one-stop shop," capable of supplying a full set of plasma-based technology. |