… So What’s All the August Fuss About?

Alas, Electronic News, we hardly knew ye: RIP.Up until now, unless someone was directly involved in backend macro defect inspection – spotting errant particles that can cause yield problems, with macro defined as particles of 0.5 microns or larger – they might not have heard of August Technology.

Based in Minneapolis, the tool vendor saw revenues of approximately $67 million in 2004, based on figures in its Q3 earnings report and its guidance for Q4 (the company hasn’t posted Q4 or year-end figures yet). Founded in 1992, the company has focused on automated defect inspection systems, finding most of its success in backend or final manufacturing applications.

Only recently has the company made moves into front-end manufacturing defect inspection, touting itself as the only company to offer “all wafer” inspection – front-side, backside and edge inspection. But its management has publicly acknowledged that it faces an up hill battle and stiff competition in getting into the front-end market, which means courting IDMs and other chipmakers around the globe.

With approximately 17.8 million shares, KLA-Tencor Inc.,’s offer to acquire August comes out to approximately $204.7 million. Not a ridiculous offer for a company that had $67 million in revenues last year and outpaced the equipment market in terms of growth rate. But it is certainly a healthy one, to say the least.

And it places August at the center of a three-way tug of war between KLA-Tencor and smaller rivals Rudolph Technologies and Nanometrics – a four-way struggle if one includes August shareholders, which have filed suit to stop August and Nanometrics’ plans to merge.

Why the fuss? Well it’s obvious one doesn’t need a macro defect inspection tool to see why August is suddenly the belle of the inspection and metrology ball.

What You Want, Baby I Got …
D-E-F-E-C-T: Find Out What it Means to Me

It’s a well-recognized trend in process technology that inspection and metrology are becoming of critical importance as design parameters, and consequently process windows, shrink. The particle defect, once something that could often be ignored, has become a common yield killer here in the deep submicron era.

So being able to spot defects and figure out where they are coming from is what all the fuss is about, and why August suddenly can pick and choose among multiple suitors.

“They’ve obviously got a very nice macro defect inspection technology people seem to want,” observed Bob Johnson, a principle analyst with market researcher Gartner Dataquest. Johnson specializes in the metrology and related markets.

For it’s part, KLA-Tencor suggested that the merger would be complementary; while it is the leader in process control and yield management in front-end apps, August is known for its inspection technology in the advanced packaging/wafer level packaging market, but has been making moves toward the front-end market.

“We have the highest regard for August Technology and its employees, and believe that the acquisition of August Technology by KLA-Tencor serves the best interests of our respective shareholders and customers,” Ken Schroeder, KLA-Tencor’s president and CEO, said in a statement.

Furthermore, sources involved in the inspection market have observed that KLA-Tencor, while it dominates many of the markets it serves, hasn’t been as successful in its forays into particle inspection.

As Dataquest’s Johnson noted, KLA-Tencor’s merger bid may not necessarily be a defensive move; given its size and dominance in other areas of the market place, it would have little to fear from a combined August/Nanometrics or August/Rudolph. But the merger would eliminate a potential competitor in the inspection space, and would add a product line complementary to its own, one with a proven track record in the industry.

Rudolph, on the other hand, may have been playing defense when it threw its merger monkey wrench into the August/Nanometrics deal, Johnson theorized. Rudolph has already begun making moves in the front-end defect inspection market as well, and may have reacted in an attempt to block the rise of another competitor.

Of course the merger would also give Rudolph that successful product line of August’s that everyone seems to covet.

As for Nanometrics, known primarily for its integrated metrology technology, it would have opened up a whole new market for the company; indeed in a conference call with analysts on the day the August/Nanometrics deal was announced, both sides touted the fact that there was no product overlap between the two companies.

“I think we all realize that inspection and metrology are cousins, sort of sister capabilities, if you will,” said Jeff O’Dell, August CEO, during an August/Nanometrics conference call in late January. “And August has done a little bit of work in metrology specifically around the bump inspection side. And … we all know that Nanometrics is taking a look at some inspection on the macro end for good reasons because our customers independently were leading us in those directions.

“So just from a pure customer standpoint, the product lines right out of the box, because they are different in terms of special metrology have, I think, that appeal from a single supplier,” O’Dell said.

So what is August looking for? Why does a company with a now obviously hot technology need a merger? It would seem to be global infrastructure and access. Both Nanometrics CEO John Heaton and August CFO Stan Piekos touched on the idea during the companies’ joint call that companies need to have global infrastructure if they are to remain competitive in the future, and that both companies would be strengthened in this respect by a merger.

Plus the two serve complimentary regional markets, said Piekos.

“In the case of Nanometrics, their largest foreign operations are in Japan,” Piekos said. “And there, they compliment us nicely because that’s one of our weaker areas. We still serve the Japanese market with a distributor network. And now that we’re moving in to the front end, we see a need to enhance our marketing distribution and marketing channels in Japan.

“August, on the hand …we started in final manufacturing or backend. We have a strong position in Taiwan, and elsewhere in the southeast. And we believe the Taiwanese position can help Nano as they expand,” Piekos concluded.

“So Tell Me, Bachelor No. 4 …”

And so the August merger saga continues, with new wrinkles seeming to occur on an almost daily basis now. The one thing everyone in the metrology and inspection market is wondering is when KLA-Tencor’s biggest rival – in terms of size, if not necessarily market penetration – Applied Materials Inc., is going to make its own public bid for August.

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

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