Fairchild unit in deal with National

Electronic News, Feb 3, 1997 by Crista Hardie

South Portland, Maine--In a $550 million buyout, Fairchild Semiconductor management, backed by Sterling LLC, a Citicorp Venture Capital Ltd. investment firm, will purchase the Fairchild logic, discrete and memory business unit from National Semiconductor.

At the close of the deal, National will receive $460 million in cash, a 16 percent equity stake in Fairchild (valued at $13 million) and a note for the remaining $77 million. Fairchild will own a 16 percent stake in the venture, which it places at a 1997 value of $700 million. The company scheduled plans to go to the public market to raise equity in the form of high-yield bonds.

The buyout deal had been expected to close in recent weeks (EN, Dec. 16, 1996), ever since the Fairchild unit went on the auction block last June, and caps off a corporate reshaping put in motion a year ago when Brian Halla took the reins at National. In an interview with Electronic News, Darrell Mayeux, VP of sales and marketing for Fairchild, said third-party deals were ruled out from the beginning, because of competitive issues.

By the end of calendar 1997, National hopes to complete the deal and the separation, from which a leaner, analog-focused National and a fairly large and financially unrestrained Fairchild are expected to emerge.

Spinning out the unit and giving it the familiar Fairchild name had been called a clever marketing move on Mr. Halla's part. But whether the company's mostly older commodity products can ever capture the interest of Wall Street was something observers questioned last week.

In 1987, National bought the Fairchild Semiconductor business for $122 million from Schlumberger. The unit was considered underpriced at the time. But what exactly accounted for a more than 4x increase in value in a decade was something Fairchild management could not pinpoint, except to say the product lines are "much broader."

"If they intend to grow the company, or take it public, at some point they will have to introduce some leading-edge products of their own," commented George Perris, president of Sierra Marketing Group and a 1970s-era Fairchild alumnus.

On the other hand, "The Fairchild product line is a cash generator. They have nice, stable product lines: power discretes, particularly, and the logic business is very good. Some of those products are almost like an annuity," noted Mel Thomsen, principal at Pathfinder Research.

According to Fairchild's Mr. Mayeux, innovative products is one of the three cornerstones of the company's strategy. For example, "Our next-generation low-voltage logic product line will be coming out of (National's) South Portland eight-inch fab. It will operate at close to 2 volts and will be blazingly fast. That product line will be introduced within the next quarter," Mr. Mayeux said. The other two areas of emphasis are high-volume, low-cost manufacturing and what Mr. Mayeux called world-class logistics.

"We literally have hundreds of part types and customers around the world. It's not easy to manage that, but it's one of our strengths," Mr. Mayeux said.

Fairchild presumably will be able to sign up some new distributors that are more in line with their commodity-oriented products than what National has lined up.

A recent move by National to Wyle after the controversial dumping of Bell Industries may have been a prelude to the eventual re-focusing of the distribution networks (EN, July 22, 1996). Wyle's business is said to be more in line with National's analog and mixed-signal communications products.

Fairchild may now seek out Bell Industries, whose focus is more in the old-line products; however, the company did not detail its distribution plan.

National's present distributors are mainly first-tier global companies, which some said may not be interested in holding onto the older lines if they don't come as part of a bigger package.

"Having those very large distributors in their sales network would be a major coup for Fairchild," Mr. Perris pointed out. Whether National's larger distributors will eventually turn away from the older, commodity Fairchild lines is uncertain. Nevertheless, "A lot of distributors in this country would be very happy to pick up the Fairchild product line. For example, Hamilton has a very large discrete operation with Motorola," Mr. Perris speculated.

Brian Halla's vision of National as a system-on-a-chip company, meanwhile, is nearing fruition. The company is bringing up a 0.35-micron process at the South Portland 200-millimeter (eight-inch) wafer fab, where plans are to pursue an application-specific standard products (ASSP) strategy based on its repertoire of linear analog and mixed-signal building blocks.

"This unlocks the inherent value in both National and the Fairchild business and enables us at National to focus in on high-growth, high-value mixed-signal and analog products that will be 80-85 percent of National's revenues going forward," Pat Brockett, National Semiconductor executive VP of worldwide sales and marketing, said in a press briefing.