Agilent Chip-Test Group Plans Mid-2006 IPO
Rick Nelson, Chief Editor -- Test & Measurement World, 8/30/2005 10:49:00 AM
The SOC and memory-test businesses of Agilent Technologies will spin off next year to constitute an independent company, according to Jack Trautman, president of Agilent’s automated test group. The spin-off of the semiconductor test operations complements the sale of Agilent's semiconductor fabrication business, announced August 15.
In a phone interview, Trautman commented on the timing of an IPO for the spin-off, on potential risks to synergies with divisions remaining within Agilent, on Agilent's reasons for initiating the spin-off, and on the benefits he says the new company will bring to investors and customers.
As for timing, a fast-track schedule would have an IPO in the new semiconductor test-company occurring within six months, Trautman said, but added that a nine-month plan looks more realistic for completing the necessary auditing and planning. He said he expects an IPO to occur in mid 2006.
The sale of the test businesses to another vendor is not in the cards, he said. In fact, he said, "We started out saying, 'what would it take for us to double down and acquire a business to create a larger footprint in semiconductor test', for example." Ultimately, he said, the spin-off was determined to be the optimal alternative.
He emphasized that the semiconductor test business is not is a business in trouble that Agilent is trying to get rid of. On the contrary, he said, "Our momentum in semiconductor test is really strong right now. Our SOC orders are up four quarters in a row, and our Q3 orders just announced are up 34% quarter over quarter and 81% from our trough in Q4 of '04. That's in comparison to a growth rate of 40% for the industry, so we are really doubling the order rate relative to our competitors."
The new company, he said, will "continue with our focus on our single scalable platform with the 93K. We have over 1000 systems installed and were the number 1 platform sold in 2004. We've installed our new Pin Scale systems now at ten of the top IDMs in the world, and these are not just demos on the floor--these are systems that have been purchased, that have been accepted, and that we've recognized revenue on." In addition, he said, semiconductor vendors "in many cases are driving downstream volume at their contract manufacturers, and six of the seven top fabless companies have started program development on the new Pin Scale systems, so there is a lot of momentum that we are going to be able to build on as we carve this company off."
The IPO will complete Agilent's intention to become a "pure-play" test-and-measurement entity, which Trautman said will be relatively immune from the volatility of the semiconductor industry, which he added has resulted in investors undervaluing the company. A hypothetical investor, he said, could construct a synthetic Agilent that would consist of shares of pure-play companies, in appropriate ratios, representing each of the businesses in which Agilent participates. Exercises involving tracking synthetic-Agilent shares, he said, suggest that Agilent is undervalued by 25 to 35%.At the same time, he said, the spin-off will create a pure-play semiconductor test company that will offer significant advantages to investors not averse to volatility. He added that "if you like semiconductor test as an industry you can buy Teradyne, you can buy Advantest, or you can buy Credence, but if you want to invest in my business, its 90% burdened by businesses that you are really not interested in. It's hard for you to invest in what I believe is the strongest of the competitors out there in our area of focus."
He explained further, "What we are doing is creating a pure play around measurement, around semiconductor chips, and around semiconductor test that will allow each to achieve its full potential." For the semiconductor test business, he said, "rather than having a board of directors that spends less than 15% of its time on semiconductor test, and whose members may not be experts in that field," the new entity "will have a board of directors that's 100% focused on understanding the dynamics of this business and understanding what it takes to be successful."
The move does invite questions about disruption in synergies between the new semiconductor test company and other Agilent businesses. "We thought long and hard about that before we made this move, because we wanted to make sure that we would be able to cut this business loose and really allow it to reach its full potential and thrive," Trautman said.
The concerns centered on relationships with the measurement business as well as the chip-fabrication division. The ATE group does employ test instruments from its sister division within Agilent, but "it will be pretty straightforward to establish an OEM relationship that we can carry forward," he said, adding, "You could argue that in some respects it allows us to look more broadly at other players in the industry who could be supplying us with instrumentation."
Another concern, he said, is ensuring availability of the test-processor ASICs and pin-electronics ASICs at the heart of the company's semiconductor test systems. "We looked very closely at that, and five years ago I couldn’t have said with confidence [that the semiconductor-test group could operate independently of the chip operation] because we were very tightly interwoven with the workings of the chip business," which was building the ASICs in house and providing design services. "Over the last five years we've made changes. We now have our own focused ASIC design team, and we are sourcing wafers from different foundries."
As the semiconductor test business spins off, the parametric-test and board test-and-inspection businesses will remain behind. That, said Trautman, is because "we wanted to create a pure-play backend semiconductor test business unencumbered by other businesses." Apart from that, he said that although parametric test and semiconductor production test businesses share the same customers as far as company names go, "the actual people we call on, the sales, the support models, and even the sales forces, are unique and differentiated," with no overlap between parametric-test and semiconductor-test operations.
As for the board-test business, he said, it does exhibit significant synergies with Agilent's Electronic Products and Solutions Group, which it will join. "EPSG is not just a box business. It also makes functional test systems. And the synergies are great for putting together board test and x-ray and optical inspection, along with end-of-line functional test, and sharing data among the various test nodes." The goal, he said, is to find defects upstream and to correlate data from the various test nodes to improve production processes in an effort to move from "defect detection to defect prevention."
The IPO will involve a two-step process. Step 1, he said, will be to float 19% of the stock in the new company to establish a market value and create working capital. If the company needs extra cash, he said, Agilent will provide it: "Agilent is committed to the success of this business." In the final step, the remaining 81% of shares will be distributed to Agilent shareholders, and the new company will be fully independent.
Since announcing the spin-off, Trautman said, the company has gone through an extensive process of contacting its semiconductor-test customers. Their responses, he said, have ranged from neutral to positive. Those providing neutral responses are concerned about follow-through on Agilent's semiconductor-test product roadmap and other commitments, and about whether the new company will have a different set of operating principles and values. His answer is that "the strengths that have brought us to where we are now are the very things we want to preserve going forward."
He added, "We've got a broad application portfolio and a strong service and support organization and are known for the quality and reliability of our products, and we are not giving up on that at all. Our customers like the flexibility and scalability of our platforms, but to be honest there are some things our customers don't like about us--some think we are hard to do business with and are not as flexible as a company as our products are or that our software is not as easy to use as it should be. These are the areas where we think we can make a difference as we carve out this new company."
He explained why he expects the new company to be well positioned to make improvements: "When you have IT systems and Web platforms and systems for doing e-marketing and e-support, and when you have to span all applications from selling chips to systems with everything in between, the systems tend to be less focused and more general-purpose and less prone to be flexible and focused on a specific market segment. We are taking a close look at that--our IT systems, our order-management systems, the way we do billing, and our terms and conditions--all of those can now be optimized for our semiconductor-test customers."
With respect to the details of the new organization, Trautman said he is working closely with Agilent CEO Bill Sullivan. "Bill has decided to launch an internal and external search for a CEO to make sure we get the best in the industry to run this business. Meanwhile the team that is already in place, which is in my opinion a very high caliber team or we wouldn't have achieved the results we have, is working on what we need to do to carve out the new company, to get it focused, and to get it to the right size. We haven't made any decisions yet around geographic footprint or around restructuring, but that work will have to happen in the very near future. We won't wait for the CEO to be named to make those decisions."
Back to September 2005 News Briefs.
