ESI wins AISI

Electronic News, Dec 8, 1997 by Chad Fasca

Cognex withdraws its bid for machine vision company fearing loss of a key customer

PORTLAND, ORE., AND ANN ARBOR, MICH.--With the weeks-long, competing-offer standoff with its machine vision competitor Cognex ended, Electro Scientific Industries, Inc. (ESI) completed its acquisition of Ann Arbor, Mich.-based Applied Intelligent Systems, Inc. (AISI). ESI exchanged 1.4 million of its shares worth $60.55 million for all of the capital stock and outstanding options of AISI.

The acquisition raises ESI to the level of a significant player in the machine vision market. Although Cognex had reevaluated AISI and pulled back its interest in the company, ESI did not flinch in finishing its original deal. Completion seemed a long way in coming, but it was only a matter of time from ESI's perspective.

"The deal we announced on Sept. 29 is the deal that closed ... We didn't change anything. We just acted like it would happen, and it did," said Joe Reinhart, VP of business development at ESI.

Critical Mass Reached

According to Mr. Reinhart, the deal is another case of reaching critical mass for two companies. For AISI, serving a global electronics market as a $30 million to $40 million enterprise was a daunting task. Now, as part of ESI, which couples AISI with a $200 million company, serving the global market becomes an achievable prospect. Now that the deal is sealed, ESI will roll its own machine vision division into its new AISI subsidiary, forming one product line. The company does not plan to move its new subsidiary from Ann Arbor and said the managerial responsibilities in Ann Arbor will be relatively unchanged.

For ESI--a longtime user of machine vision systems and a small player (roughly $5 million to $6 million annual run rate) in selling systems--it means that AISI bumps ESI up to a $35 million to $40 million run rate. According to ESI executives, this would bring the company a slot in the top three OEM machine vision suppliers.

"Through the combination of AISI's products, technology and people and ESI's strong electronic equipment experience, we are well-positioned to serve the needs of this demanding and expanding market," said Donald R. VanLuvanee, ESI's CEO and president.

While ESI refrains from making solid predictions about where its machine vision subsidiary will go in terms of revenues, executives point out that the market is growing annually at a 17-19 percent rate, and the company would expect itself to grow with the market.

Closing this deal seemed a long way off and anything but assured several months ago. The stakes regarding ESI's acquisition had been raised when Cognex made public its own, richer offer for AISI. ESI had reached a signed agreement with AISI and expected to close the acquisition in late October. However, the new offer looked to change things dramatically. ESI expressed surprise with the move. But ESI had not been alone in talking to AISI. Cognex had some discussion with AISI prior to their deal with Electro Scientific Industries (EN, Oct. 13).

Cognex's Acquisition Moves

Over the past two years, Cognex had completed three acquisitions for the purpose of expanding its business with new technology, products, customers and applications.

Cognex coveted AISI for several of its customers. AISI customers include: Kulicke & Soffa Industries, Universal Instruments and Motorola in the U.S.; Siemens in Germany; Philips N.V. in Holland; Canon, Sanyo Silicon, Toshiba, Japan-EM and Ishikawajima-Harima Heavy Industries in Japan; Samsung and Haitai Electronics in Korea; and Motorola in Malaysia, Taiwan, Hong Kong and the Philippines. Cognex CEO Robert Shillman cited Kulicke & Soffa and Universal Instruments as the two customers the company was specifically interested in.

Cognex went so far as to send AISI a signed offer. In an interview at the time, Dr. Shillman said, "It is not an offer they have to discuss. We sent them a signed contract."

Approximately a month later, Cognex would take this all back--withdrawing its bid. Cognex issued a release distancing itself from the offer and AISI. The company claimed that one of its major interests, which was confirmed by ESI to be Kulicke & Soffa, was internally developing an alternative to AISI. Cognex also speculated that AISI was not as financially healthy as it had initially thought.

ESI Was `Very Thorough'

For ESI, however, the proof has been in the closing. Company executives claim to have done a "very thorough" appraisal of AISI, addressing "all the issues that Cognex seemed to raise." It was pointed out that Kulicke & Soffa, like most companies, maintains capability internally for critical technology areas. Until 1989, they had their own machine vision system, before the company awarded its contract to AISI "essentially outsourcing that."

"We don't see K&S' activities as threatening; we see it as KBS maintaining expertise just as we maintain expertise," said Barry Harmon, ESI CFO. As far as AISI's financial health, AISI sales for the three months ending Aug. 31 were $8.73 million, according to ESI. Consequently on both fronts, ESI was unmoved by Cognex's withdrawal.