… 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.

Mattson Sheds Wet Clean Business

Alas, Electronic News, we hardly knew ye: RIP.There can be no better indication of how the industry has changed over the course of the past three years than Mattson Technologies Inc.’s divestiture of its wet surface preparation division.

The Fremont, Calif.-based equipment supplier today announced it would be selling its wafer wet cleaning division to rival SCP Global Technologies Inc., the No. 2 wet bench supplier behind Japanese player DaiNippon Screen Co.

The move by Mattson had been in the rumor mill for some time prior to today’s announcement.

The companies did not release terms of the definitive agreement they signed, but they did say they are pursuing a strategic alliance to develop integrated wet and dry cleaning processes. Under the alliance, Mattson and SCP would cross license intellectual property, which they believe would significantly increase development efficiencies.

SCP did say it would receive $50 million in venture capital and have access to a $20 million line of credit, both happening concurrently with the close of the Mattson deal, leaving the company well capitalized. Mattson will absorb yet another restructuring charge upon close of the acquisition.

The announcement came in conjunction with Mattson’s Q4 2002 and year-end results, in which the company posted net loss of $31.9 million, or 71 cents per share on the quarter, and a loss of $94.3 million or $2.23 per share for the full-year. While Mattson’s losses grew quarter over quarter, they improved 72 percent year over year, even while bookings remained flat from 2001 to 2002 at $186 million.

That improvement came because of significant restructuring and focusing on core competencies, said Dave Dutton, president and CEO. The company’s ongoing efforts in these areas include the shedding of its wet wafer clean division, leaving it with rapid thermal processing (RTP) and photoresist cleaning, or dry strip.

“Our industry has changed permanently. … This is more than just a cyclical downturn,” Dutton said during a conference call today with analysts. Companies must change with the times, in order to survive, he added.

As a result, the company is embarking on a plan it calls cyclically flexible enterprise, in which Mattson aims to remain profitable in terms of an operating income during all points of an industry cycle going forward. To do this it must concentrate on its core competencies — areas of the market where it has technology and market leadership, Dutton said. It also means utilizing lean manufacturing principles where feasible, such as outsourcing the assembly of mature 200mm equipment, and developing other strategic partnerships such as the one it is pursuing with SCP Global.

“We view this strategy as most critical to us,” Dutton said, adding that he expects other companies that haven’t done so already to begin taking similar avenues of business.

At first glance, the wet products division doesn’t seem to be that harmful to Mattson. Revenue for the wet division was $90.9 million, about 45 percent of 2002 revenue, according to CFO Ludger H. Viefhues. But that percentage was higher than average because of deferred revenues under accounting rules related to the U.S. Securities and Exchange Commission’s Staff Accounting Bill 101, Viefhues said during the conference call.

At the end of 2002, the wet clean division accounted for 357 employees out of 1152 total. On a shipment basis, revenue per employee in the division was half that of employees in the RTP and strip divisions. “These products heavily impacted our resources,” Viefhues remarked. “The divestiture changes this.”

Mattson — and an industry — changes its tune

Layoffs, consolidation and divestiture of unprofitable divisions have become so commonplace in the industry, particularly among its equipment suppliers, that it’s almost not even newsworthy anymore. But Mattson’s actions today are symptomatic of something deeper than merely improving the bottom line in an effort to get back to profitability.

Back in 2000, many companies were concentrating on achieving critical mass. In fact, the term critical mass was one of the more popular terms in the marketing lexicon of the time, as the industry enjoyed phenomenal growth and a lot of pie-in-the-sky forecasts of continued growth and an end to industry cycles.

A few years later, as the downturn that began at the end of 2000 extends into its third year, the industry has become much more concerned with being lean and concentrating on core competencies, rather than growth through acquisition. Many companies are discontinuing unprofitable business units or selling them to rivals, such as Mattson is doing with SCP, and at the same time seeking partners to distribute the cost of development and R&D.

Mattson added RTP and wet bench tools to its strip repertoire back in 2000 with its acquisition of the semi equipment division of German supplier Steag Electronic Systems AG and its U.S. wet process rival CFM Technologies Inc.

“The industry is consolidating, and you are either getting big or getting acquired,” founder and then CEO Brad Mattson told Electronic News back in 2000. “This was my strategic priority: to grow and keep growing,” he said.

Analysts and competitors alike at the time said it was a shrewd move by Mattson. By offering both wet and dry cleaning tools, the company was in a position to stake out leadership in surface preparation, particularly in the emerging copper dual damascene market.

At the time the combined projected revenues of the three companies were between $460 million and $500 million, making Mattson the 15th largest equipment vendor in the world. The company was well on its way to becoming a huge deposition company, having moved into chemical vapor deposition (CVD), and epitaxial deposition, as well as wet and dry clean and RTP.

Needless to say, times have changed; Mattson’s revenue last year was $203.5 million, a 12 percent drop from 2001.

The timing of the three-way merger coincided with the worse downturn in the industry’s history, making it problematic at best. Like most if not all of its fellow tool vendors and competitors, it has been forced to dramatically cut costs, trimming the fat and sometimes even muscle from its operations, undoing in part what the merger put in place, while it concentrates on what it does best: RTP and strip.

“Unfortunately, Mattson could never get their arms around Steag and the wet group,” said Dean Freeman, a senior analyst with market research firm GartnerGroup’s Dataquest unit. Had the three-way merger been accomplished early in 2000, the company might have been more successful in achieving leverage and momentum in all of its new markets, he suggested.

While critical mass may still be in important in terms of servicing a global market that turns more and more to outsourcing, lean operations have become a way of life.

Divestiture of the wet clean group was the last step for Mattson, said Dutton. The company has already announced that it’s narrowing the focus of its epitaxy and CVD units to existing strategic customers.

“We believe the industry has changed,” Dutton reiterated. “We’re coming out of 2002 much tougher and much better prepared to operate in all cycles.”

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.

Outsourcing Has Its Dark Side

Nanometrics Opts for Vertical Integration Instead

Alas, Electronic News (the print edition): we hardly knew ye!

The metrology company is bucking the trend and has become more vertically integrated to guarantee its ability to ramp whenever the industry recovers. A key part of its strategy is being able to deliver its metrology tools quickly and at the same time being able to directly ensure quality.

When the next upturn does come, having its own in-house machine shop will be a competitive advantage for Nanometrics over its larger competitors, according to its CEO John Heaton.

John Heaton, Nanometrics CEO“My only advantage as a small company is to do something quickly, better, faster, cheaper,” Heaton explained. In the past, Nanometrics would have to compete during an upturn for time at local machine shops that also served much larger companies, such as KLA-Tencor Inc., a competitor, and Applied Materials, a customer.

Needless to say, the larger companies often took priority. Furthermore, there was such a rush during 2000 among the entire supply chain that the company had quality-control problems with its suppliers. Thus Nanometrics has brought its own machine shop, anodizing shop and related parts of the business in-house.

But there is more to the strategy than guaranteeing quality and the ability to ramp production. Many of the machine shops used by process technology OEMs were hit hard by the two-year economic downturn. A number of them have closed their doors, which could dramatically impact the ability to ramp for the companies that have relied on them in the past, Heaton said.

“No one is talking about that right now. We believe we will have a competitive advantage,” he added.

Nanometrics’ size and its business model lend themselves to vertical integration. The company has been an early proponent of integrated metrology in an industry that is just beginning to seriously come around to the idea. The company has based its technology on integrated metrology modules, and then migrated that technology to its stand-alone platforms, rather than the other way around.

“We start with a clean sheet of paper and say how do we take our technology and redesign it?” said Peter Gise, Nanometrics’ senior marketing manager.

That has meant the key components of its systems are small, compact systems, which are not particularly challenging for an in-house machine shop to produce quickly while maintaining quality. And by bringing the manufacturing in-house, it keeps the cost of the finished integrated metrology modules down by eliminating a step in the supply chain, he said.

“We believe integrated metrology is the way to go,” Gise said. But this is not to suggest that the company has forsaken its off-line tool base. “We haven’t exactly bet the farm because we still have off-line tools,” he added. But the concept is gaining traction in both OEM and end-user customers. “In three to five years ? it’s really going to take hold,” he said.

With chip production lot sizes decreasing along with feature sizes and cycle times, process parameters are becoming increasingly tighter, and defects more critical. Using feed-forward and feedback of metrology data to control process excursions during production runs is becoming an increasingly popular idea among chipmakers, Gise said. As a result, Nanometrics has begun expanding beyond its traditional thin-film measurement to metrology applications for lithography, planarization, deposition, etch, and copper and low-k films.

This past week the company rolled out the Nano CLP-9010, a laser profiler that nondestructively monitors the metal loss between an isolated copper feature and the surrounding dielectric region. The module is designed to integrate within a metal chemical mechanical planarization tool. It is a new technology for Nanometrics, and an application driven by and large by its OEM customers, Heaton said. Interest in the new module was nearly instantaneous, he said, adding that the company started receiving calls from customers within hours of the news release.

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.