Schlumberger Will Sell Its Ailing Fairchild Unit : National Semiconductor Will Pay $122 Million; Analysts Describe Deal for Chip Maker as a ‘Steal’
National Semiconductor, whose outspoken president left Fairchild Semiconductor two decades ago, agreed on Monday to buy the struggling Silicon Valley pioneer for $122 million.
The price, described by several analysts and competitors as “a steal,” is about half of what Japan’s Fujitsu Ltd. was prepared to pay Schlumberger Ltd. for its Fairchild unit earlier this year.
Fujitsu’s deal to acquire an 80% stake in Fairchild collapsed amid opposition from the U.S. government, which cited national security grounds. Fairchild, founded in 1957, is the birthplace of the integrated circuit and has been a fount of semiconductor industry talent and technology.
As many as 200 companies in Silicon Valley can trace their lineage to Fairchild, and many of them--including National--lobbied hard to keep Fujitsu from buying the company.
Monday’s announcement was greeted by a collective sigh of relief in Silicon Valley. Fujitsu’s acquisition of Fairchild would have given the Japanese concern a distribution network that would take years to build and possibly access to sensitive military technology.
“This is the latest in a series of victories for the U.S. semiconductor industry,” said Regis McKenna, a Palo Alto marketing consultant and venture capitalist, who also cited last year’s semiconductor trade agreement with Japan and the formation of a U.S. research consortium known as Sematech.
Former U.S. Rep. Ed Zschau, one of the few prominent Silicon Valley figures who publicly supported Fujitsu’s bid, belittled that view. National President Charles E. Sporck “wouldn’t be buying it unless it was a good deal,” said Zschau, currently a venture capitalist.
The deal also marks the continuation of a trend toward consolidation in the semiconductor industry as the business emerges from the worst downturn in its history. Earlier this year, Advanced Micro Devices purchased Monolithic Memories, while SGS of Italy merged with Thomson SA of France.
“What is significant about this merger wave is that it represents consolidation within the industry, rather than outsiders buying into the industry,” noted Dan Klesken, semiconductor analyst at Montgomery Securities.
Outsiders--including Schlumberger and United Technologies, which bought Mostek--have stumbled badly in their forays into the semiconductor business.
Schlumberger, the New York-based oil field services concern whose disastrous eight-year plunge into semiconductors has cost it hundreds of millions of dollars, said it will lose another $220 million on the sale.
Schlumberger paid $425 million for Fairchild in 1979 in the mistaken belief that the technological prowess of Schlumberger’s engineers could be easily transferred to an unrelated field.
Schlumberger spokesman Seth McCormick said: “Silicon Valley ain’t the oil business. It was a clash of cultures--and an expensive lesson.” Although the deal must still clear antitrust hurdles, most observers expect the transaction to go through.
The relief in Silicon Valley did not extend to Cupertino, Calif.-based Fairchild, whose 9,000 employees now fear widespread layoffs. Fairchild’s management, whose competing bid to buy the company failed, didn’t return phone calls seeking comment.
The Fairchild acquisition “will certainly fill important holes in National’s product line, but it will also result in redundancies,” noted analyst Drew Peck of Donaldson, Lufkin & Jenrette in New York.
Fairchild is best known for its logic chips used in supercomputers and mainframes, while National’s devices are frequently employed in the manufacture of peripheral equipment. Both companies are also military suppliers.
“We believe this acquisition provides complementary strengths--broadening our product offerings, customer base and technology,” Sporck said.
Wall Street apparently agreed. National’s stock closed Monday at $15.75 a share, up 87.5 cents, in heavy trading on the New York Stock Exchange.
Analysts said that National--which is buying Fairchild with stock and securities known as warrants that provide the right to buy stock at a specified price--got a bargain.
“Once the euphoria over the deal settles down, the pundits are going to start wondering whether National can get its arms around Fairchild and its massive problems,” predicted Bruce Entin, a vice president at LSI Logic, a Milpitas, Calif., semiconductor company.
For now, however, few are betting against Sporck, who in 20 years has taken National from $7 million a year in revenue to nearly $1.9 billion.
NATIONAL SEMICONDUCTOR AT A GLANCE National Semiconductor, based in Santa Clara, Calif., is a major manufacturer of semiconductor components for computer equipment and ranked 11th in worldwide chip sales last year. The company also makes point-of-sale checkout systems and markets IBM-compatible computers.
Year ended May 31 1987 1986 1985 (billions) $1.868 $1.478 $1.788 (millions) (24.6) (91.5) 43.2
Assets: $1.499 billion
Employees: 29,200
Shares outstanding: 91.7 million
52-week price range: $8.50-$16.625
Tuesday close (NYSE): $15.75, up 87.5 cents.
FAIRCHILD SEMICONDUCTOR AT A GLANCE Fairchild Semiconductor of Cupertino, Calif., a pioneer among Silicon Valley’s high-technology companies, was ranked 14th worldwide in semiconductor sales last year. It was acquired by Schlumberger Ltd., the world’s largest oil services company, for $425 million in 1979 and has been a unit of the New York company ever since. Schlumberger had tried to sell 80% of Fairchild to Japan’s Fujitsu Ltd., but the deal was blocked in March by the U.S. government on national security grounds.
1986 1985 1984 Revenue $488 $506 $689 Net income ($93)* ($627)** $9 (loss)
Employment: 9,000
* Includes gain of $53 million on settlement of lawsuit.
** Includes $250-million writeoff of goodwill, $86-million loss on disposal of assets and $102-million charge for consolidation of facilities.
Source: Schlumberger Ltd.
