Saving for a rainy day: Cash in the bank is a priceless investment for electronics firms

Electronic News, July 29, 2002 by Ed Sperling, Liz Neely

A sustained downturn in the stock markets is sharply reducing the amount of available cash for running businesses, making it harder than ever for companies to raise money and providing a huge advantage for companies that have cash in the bank.

Executives across the electronics industry say that while a recovery of sorts has set in, sustaining it will be a challenge because of the loss of market capitalization coupled with a depressed stock price. "The question of sustainability is more present today," said Rick Hill, president and CEO of Novellus. "We are precariously close to a liquidity crisis that will affect the equity industry and our customers' customers."

Hill said that many companies do not have a lot of money on their balance sheets and traditionally have used the equity markets to raise capital as needed for everything from expansion to paying their bills. That also leaves companies with their own war chests with the ability to acquire companies relatively cheaply, or to fund their own projects and thereby gain a competitive advantage. And most big companies have been socking away cash just in case. Intel, for example, now has about $12 billion in cash in the bank, while Applied Materials has about $5 billion.

It's no secret that it's harder for companies to get funding in today's economy than it was a few years ago. Companies that face the most challenges are the smaller startups, said Bill McClean, president of research firm IC Insights. "Companies such as Intel and Samsung can fund [their projects] with their own cash."

Larger companies aren't having too much trouble securing money, McClean said. For example, Israel's Tower Semiconductor seems to have no difficulty attracting the funding it needs for the 200mm fab it's building in Migdal Haemek, Israel. Last week the company announced it would receive another $15 million, an investment from the Ontario Teachers Pension Plan.

"I think everyone is out there beating the bushes trying to get funding for various projects, whether its joint ventures or going out and trying to raise capital," McClean said. "Otherwise, so far I think [most companies] are able to get what they want."

AS with anything else, timing is everything. Photronics, for example, issued a $200 million convertible note last December to retire some of its debt.

"In severe downturns, you have three opportunities," said Photronics CEO Dan Del Rosario. "You can refinance or reduce your interest costs; you can make acquisitions for reasonable prices; or you can dip into the talent pool and strengthen your staff. We've been looking at all three."

But companies with cash also seem to be reluctant to part with it at the moment. That was evident last week as several chipmakers lowered their capital spending budgets. Across the board, companies are doing cost-analysis exercises, seeing what they should keep in-house and what should be outsourced.

"The market is playing right into [foundries'] hands," McClean said. "Their goal is to convince the big guys not to put up that next big fab ... I think you'll see that if the money gets tighter, more will use fabs."

And companies that see semiconductor product revenues as only a small portion of their overall sales will likely continue to divest noncore businesses, McClean said. "It just doesn't make sense. The price of ICs has gone down so dramatically. IC selling prices are down to the point they were 10 years ago in 1992."

Dan Scovel, a semiconductor analyst at Needham & Co., says there are few, if any, semiconductor companies facing liquidity problems.

"In the semiconductor space, it tends to be such a volatile space that the weak balance sheets tend to be weeded out pretty quick," Scovel said. "In general, most semiconductor companies, especially going through the downturn we've been through, are very sensitive to balance-sheet health."

The companies that have been late to boost their cash position will be the ones who are late getting back on track once the recovery takes hold, Scovel said, adding that most should know the general rule: "Get money when you can get it, not necessarily when you need it.

"I think most companies were smart enough to take advantage of favorable equity market conditions a while ago," he said.

Most public semiconductor companies are in pretty good straits, Scovel said. The distressed companies are very much the exception, he said. The problem is much more pronounced in the private markets. "It's a self-correcting problem. This industry is so unforgiving that if you don't have that figured out [by now], you won't last very long."

The companies running low on cash have already cut back on purchases, said Mark Grossman, a semiconductor analyst with SG Cowen. "If there's a silver lining to all of this, it's that it gets [companies] in a position to really conserve cash, and they're forced to rationalize businesses," Grossman said.

Several companies continue to reduce spending, even more so in the last six months, as it becomes clear that no one knows for sure when a strong recovery will begin. "A general lack of liquidity by customers would result in less expenditures ... telecom has certainly plummeted... [but] it's more a question of end-demand than liquidity," Grossman said.