Deal to Sell Fairchild Semiconductor to Fujitsu Canceled

Retreating from a firestorm of U.S. opposition, Schlumberger said on Monday that it and Japanese computer giant Fujitsu had called off plans for Fujitsu to buy 80% of Schlumberger’s Fairchild Semiconductor unit.

In a tersely worded statement, the U.S. office of France-based Schlumberger said “the rising political controversy in the United States concerning the venture made it unlikely that the sale of Fairchild could be completed within a reasonable time.”

Although the various governmental agencies reviewing the proposed acquisition had yet to reach any decisions, a spokesman for the French oil services and technology firm said that since the deal was announced last October, it has faced a “barrage of opposition, which has been increasing,” from government and industry.

Just last week, Commerce Secretary Malcolm Baldrige publicly reiterated his opposition to the combination of the U.S.-based chip maker and Fujitsu, which makes computers and other electronic goods as well as semiconductors. Baldrige and Defense Secretary Caspar W. Weinberger were said to have spearheaded efforts within the Reagan Administration to kill the deal, including the highly unusual move announced last week of scheduling a Cabinet-level discussion of the acquisition.

“There were no legal avenues open to the government to oppose it. These were political reasons,” said W. T. McCormick, manager of public relations at Schlumberger’s New York office.

The collapse of the agreement was expected to have a chilling effect on any future acquisition of a U.S. chip maker by a Japanese rival despite increasing joint ventures and other collaborative efforts between the two camps.

Schlumberger will continue to operate the money-losing venture while looking for another buyer. “Termination of the agreement opened other avenues,” the Schlumberger statement said, most notably a leveraged buyout by current management.

Other buyers--including other Japanese companies--were said to have expressed interest in Fairchild after the agreement with Fujitsu was announced. Prospective Japanese buyers will almost certainly be dropped from the list, but major U.S. chip makers may enter the bidding. Applied Micro Circuits, a small San Diego-based company, said in January that it would buy the defense-related operations of the Cupertino, Calif., company.

Although no price tag had been disclosed, industry observers had estimated the value of the deal at $200 million. In December, Schlumberger said it was taking a $200-million charge against annual earnings related to Fairchild.

Industry analysts believe that Fairchild will lose about $95 million this year.

Schlumberger’s statement said: “Among the alternatives being considered is a leveraged buyout by Fairchild management.” The Fairchild division is currently headed by President and Chief Executive Donald W. Brooks, but officials of both Fairchild and Schlumberger refused to elaborate on possible buyout discussions.

In fact, the announcement from New York caught officials at Fairchild’s Cupertino headquarters and at Fujitsu’s U.S. offices in San Jose unaware. Both offices said officials there were unable to comment.

And despite the rash of negative comments as late as last week, Washington agencies remained curiously silent on Monday, saying they had no comment on the Schlumberger announcement.

In addition to Baldrige’s stated concerns on international trade issues--including Fujitsu’s continued prominence in the supercomputer market--the Pentagon has raised issues of national security concerning the deal. Defense Department officials reportedly had split over whether the sale would dangerously increase the U.S. military’s dependence on foreign producers for sensitive advanced technologies.

Although several agencies were reviewing the deal, only the Justice Department could have stopped the deal outright, on antitrust grounds. It was generally acknowledged in Washington and in the industry that there was no strong antitrust case. But Washington sources said other agencies could have placed restrictions on the new combination, in regard to U.S. government contract work, that would have made the deal burdensome at best and unworkable at worst.

The proposed acquisition also stirred controversy within the U.S. semiconductor industry, leading to worries of increased dominance by the Japanese and an unraveling of a complex but delicately balanced system of distribution that was based to no small degree on loyalty to either U.S. or Japanese lines.

In this light, industry observers said, the breakdown of the deal between Schlumberger and Fujitsu appears to be a victory for those in the U.S. government and industry who have been seeking to strengthen the U.S. chip-making industry, most especially through measures designed to keep Japanese competition at bay.

From the start, the deal has been plagued by poor timing. Its announcement last October came just as U.S. chip makers were stepping up their claims that Japanese competitors, including Fujitsu, were not abiding by a hard-won trade agreement on semiconductors. Also, separate efforts by the U.S. semiconductor trade group and the Defense Department were constructing proposals for a consortiums of chip makers to help the U.S. industry regain its leadership in the market.

Fairchild, one of the earliest of the covey of high-technology firms to nest in the Silicon Valley area of Northern California, was purchased by Schlumberger in 1978. That acquisition did not incite the virulent opposition that the Fujitsu deal has, Fairchild officials have pointed out.

Drew Peck, semiconductor industry analyst with Donaldson Lufkin Jenrette Securities in New York, said he was surprised that Schlumberger had waited this long to call off the deal, considering the “rude” behavior of U.S. officials.

“It’s too bad,” Peck said. “Both U.S. and Japanese semiconductor companies have a lot to offer each other. Neither industry is particularly healthy and there is some synergism. . . . They’d be stronger in tandem. But there is a fear in the U.S. industry as to what are the real motives of the Japanese.”