Samsung rumors pour cold water on Semicon

SAN FRANCISCO — Rumors that Samsung Electronics Co. Ltd. this week pushed out its fab-tool orders sent shock waves at the Semicon West trade show here, putting vendors in a somber and gloomy mood. The chain of events also prompted many to predict an acceleration of the current shakeout taking place in the fab-tool arena.

The semiconductor-equipment market was already in the midst of a slowdown amid what some call a ''disconnect'' in the sector. Fab utilization rates remain high, but capital spending is down by some 20-to-25 percent due to a lull in ICs.


Compounding the ''disconnect'' at Semicon West is a solar event, which is running in tandem at the show. While there is a buzz at the Intersolar event, the semiconductor fab-tool portion of the show is relatively quiet, with vendors grumbling about the lack of foot traffic in their booths.


Reports that Samsung is now putting the brakes on its capital spending exacerbated the doom-and-gloom sentiment. Samsung is the world's largest buyer of capital equipment, surpassing Intel Corp. several years ago, it was noted.


Amid the Samsung rumors, many are beginning to whisper the ''D'' word: downturn. Still others say it's much worse and calling it a depression.


The net effect: Expect an acceleration of the ongoing shakeout in the fab-tool and electronics materials industries. The strong will get stronger and the weak will not survive over the long haul.


Which companies are the next takeover targets? Axcelis, ASMI and Asyst are currently fending off unfriendly takeover bids. Perhaps some big-name players--Lam, Novellus and Varian--are in play. Most certainty, the new startups will be the first takeover targets.


Clearly, the landscape will change--again. Indeed, the current outlook reminds many of the severe and deep downturn in 2001. The semiconductor-equipment market is projected to hit $34.12 billion in 2008, down 20 percent over 2007, according to SEMI.


In comparison, the fab-tool market grew by 6 percent in 2007, according to SEMI (San Jose, Calif.). Following the downturn in 2008, the semiconductor-equipment market is projected to rebound with annual growth of 13 percent and 6 percent in 2009 and 2010, respectively, according to the trade group.


The poor climate in 2008 is due to ''lower spending in the memory sector and a less than favorable device pricing environment,'' said Stanley Myers, president and CEO, of SEMI at a press event.


Capital spending in the memory sector is especially troublesome, said Rick Hill, president and chief executive of Novellus Systems Inc. (San Jose, Calif.) "No one can argue that memory is under pressure,'' Hill said during the company's analyst meeting. "Do I think the market will get better when I wake up in the morning? Hell no. I need Maalox every morning.''



In addition to the business woes, the U.S. sub-prime mortgage crisis and soaring oil prices ''creates uncertainties'' in the overall economy, thereby impacting consumer spending for electronic goods, said Harvey Frye, president of Tokyo Electron America Inc. (Austin, Texas). Tokyo Electron America is the U.S. subsidiary of Japanese semiconductor equipment giant Tokyo Electron Ltd. (TEL).


A poor memory environment, coupled with economic woes, spells bad news for vendors. ''This is a big downturn," declared Mike Splinter, president and CEO of Applied Materials Inc. (Santa Clara, Calif.), at the company's analyst meeting.


Overall, semiconductor equipment is a ''tough market," he said. Originally, Applied projected that the front-end equipment market would fall by 5-to-15 percent in 2008 over 2007. Now, the world's largest equipment vendor projects that the wafer-fab equipment segment could fall bt 25-to-30 percent this year, he said.


On the bright side, flat-panel displays are still growing and capital spending could jump by 30 percent in 208. "Capex has been bigger than what we expected,'' he said.


Applied, which has made a number of acquisitions in the solar-gear market, also sees strong growth in that business. The company ''has not caught up'' with demand for solar gear, he added.

2009 forecast

Going forward, some see a slight recovery in 2009. Others see a prolonged downturn.
Much of the recovery hinges on the memory market. But a recovery ''is hard to predict,'' said Brian Trafas, chief marketing officer at KLA-Tencor Corp. (San Jose, Calif.). "Until we see an uptick in memory pricing, it's hard to see any capacity buys.''


"2009 looks like a flattish year," said Jerry Cutini, president and CEO of Aviza Technology Inc. (Scotts Valley, Calif.) ''Flat would be considered good in 2009.''


2009 could take a turn for the worse--if, say, oil prices continue to soar. "If oil goes to $200 a barrel, it's going to be a bad year,'' he said.


During a presentation, Tom St. Dennis, senior vice president and general manager of the Silicon Systems Group at Applied Materials, listed several drivers that could bring the industry out of its slump. Among the major drivers are DDR3 memory, solid-state storage drives, and next-generation communications and graphics chips, he said.


What is clear that the landscape will change in semiconductor equipment. For example, no less than three vendors are fighting off hostile takeovers.


Applied's Splinter recently reiterated that its offer to buy part of ASM International (Bilthoven, the Netherlands) was "full and fair." Late last month, ASMI rejected the unsolicited offer from Applied Materials and private-equity firm Francisco Partners to acquire all of ASMI's front-end businesses for up to $800 million.


Chip-equipment maker Axcelis Technologies Inc. (Beverly, Mass.) said that the company, Japan's Sumitomo Heavy Industries Ltd. (SHI) and private-equity firm TPG Capital have entered into a ''confidentiality agreement'' with respect to discussions between the parties. The companies did not elaborate, but for some time, SHI and TPG have made various unsolicited offers to acquire Axcelis.


Contrary to popular belief, Aquest Systems Corp. has not given up on its efforts to acquire Asyst Technologies Inc. Fab-tool automation firm Asyst recently announced that it had received notice from Riley Investment Partners Master Fund L.P., a hedge fund that with related parties claims to own 2.6 percent of Asyst's outstanding shares.


Riley intends to nominate six directors for election at the company's 2008 annual meeting in an attempt to gain control of Asyst's board. Riley's notice stated that its nominees, if elected, intend to sell the company through an auction process.


Adding to the intrigue, Aquest is an investor in Riley, said Mihir Parikh, president and CEO of Aquest. Parikh was also the founder of Asyst and its CEO from its inception in 1984 until 2002. And if or when Asyst goes up for sale, Aquest will be one of the bidders, he said.