ON Off and Running

Electronic News, May 8, 2000 by Carol Haber

ON Semiconductor Inc. is on the acquisitions trail as the former Motorola Semiconductor Components Group (SGC) makes growth plans in the wake of a $448 million 30-million-share IPO.

The company could be searching for a niche analog firm to blend with its overall power management portable focus. The price would have to be right, though, and competition would be hot indeed. ON could also be looking to improve its footprint and scale in its core discrete business, a consolidating industry.

"Acquisitions are definitely a part of our growth strategy," said a spokesman for ON. He called the recent $250 million acquisition of Cherry Semiconductor "a good example" of the kind of acquisition ON may pursue. Cherry focuses on the power management side of the analog market, and "that is certainly an area we're focused on," the spokesman said.

ON could also be intrigued by its customer Lucent Technologies' move last week to put its $1.2 billion Power Systems business on the block. The Phoenix-based ON sells its semiconductors to customers such as Agilent Technologies Inc., Hewlett-Packard Inc., and Lucent. But the business Lucent is selling is "a hybrid," a combination of systems and chips. The chips portion would have to be separated out to make it interesting for ON, according to an analyst who did not wish to be named. The Lucent unit specializes in the Titania product line, a series of power supplies designed for microprocessors and other semiconductor devices. Lucent expects to name a buyer within six months.

ON specializes in standard analog, standard logic, and discrete products. Analog products accounted for $329 million in revenues, 20 percent of sales; logic products, $386 million, or 24 percent of sales; and discretes, $905 million, or 56 percent of sales, based on 1999 pro forma performance as part of Motorola. The recent acquisition of Cherry added $130 million to the analog portion.

"The components they sell are not as flashy as system-on-a-chip or DSPs but are very necessary to leading-edge products," noted Grant Johnson, industry analyst, In-Stat Group. "ON's whole strategy is to remain in the core lines."

The company touts products such as a low drop-out regulator, a version of which manages power in portable cell phones. In logic, it offers a family of very fast broadband ICs that can deliver data at up to 3GHz for datacom, routers, and other telecom devices. In discretes, ON offers an ignition IGBT (insulated gate bipolar transistor) for the automotive market.

ON was spun out of Motorola Inc. in August last year and sold to Texas Pacific Group (TPG) and some SCG managers. It was a typical transaction for TPG, which tends to buy companies that are not tech-intensive but rather have a preponderance of business in high-volume, manufacturing-cost-driven product lines like ON. Still, one analyst noted, ON has some "extremely high-proprietary" high-margin products in its portfolio, such as emitter-coupled logic. Those products are aimed at "the high-speed building block market," and could help ON grow faster than the markets it serves, the analyst said.

ON hit Nasdaq on April 28 with shares priced at $16 each. They surged to a high of $27 at one point but by midday Thursday were trading at $21.75. The company said IPO proceeds will be used to redeem preferred stock and pay off loans. Motorola, which restyled itself for the more specialized areas of the telecom market, still owns about 9 percent of the voting common stock.

In the first quarter ended April, ON Semiconductor reported net income of $25.5 million and net product revenues of $451.5 million. "Although their business is trailing-edge, it is taking off. There is plenty of demand," noted In-Stat's Johnson.