U.S. Taking Long Look at Semi-Gas Deal : Semiconductors: The small Silicon Valley firm makes systems crucial for advanced computer chips, and nobody does it better. Now the Japanese want to buy the place.
Andrew K. Lorenz is retiring this week, a concession not so much to the years--he’s only 53--as to the energies used up in starting, building and selling three companies in Silicon Valley.
For the past two years, Lorenz has been running Semi-Gas Systems in San Jose for its current owner and anticipating his halcyon days. “I planned to take what’s left, take my wife and go sailing,” Lorenz said last week, as his ties to the company that he founded were coming to an end.
Yet Lorenz is torn about leaving, caught up in the controversy surrounding the proposed sale of Semi-Gas to a Japanese competitor.
The $23-million deal between Hercules Corp. of Wilmington, Del., and would-be owner Nippon-Sanso of Tokyo has been put on hold by U.S. government reviews. Meanwhile, vocal opponents are looking for ways to scuttle the sale.
The deal is just a speck in the overall picture of foreign acquisition of U.S. companies but is significant because of Semi-Gas’ role in the U.S. semiconductor industry.
Semi-Gas is a leading maker of gas-handling and purification systems--large, expensive chambers and complex controls used in making computer chips. Those who want to block its sale warn that too much of the U.S. semiconductor industry’s infrastructure is passing into foreign hands, jeopardizing American efforts to regain leadership and sacrificing the long-term economic and security benefits that a healthy chip industry brings.
“We are very concerned; our strategic materials base is being bought out lock, stock and barrel,” said Peggy Haggerty, an industry lobbyist.
Such concerns have prompted the federal interagency Committee on Foreign Investment in the United States to review the sale. Although it can recommend Cabinet-level discussion or presidential action, the committee on its own has no power to stop the deal. The Antitrust Division of the Justice Department does, however, and it is continuing a protracted review of the proposed sale. Meanwhile, opponents are lobbying, testifying before Congress and even applying behind-the-scenes pressure on Nippon-Sanso, hoping to generate the kind of heat that helped drive off Fujitsu three years ago when it wanted to buy U.S. semiconductor pioneer Fairchild.
“The question is, when there’s a critical item or a critical industry that has national security implications, is it wise to have (it) controlled by a foreign producer?” said Clyde Prestowitz, president of the Economic Strategy Institute, a Washington think tank. And, said Prestowitz, “the debate is over America’s wealth-producing capacity in the future and over America’s independence of action.”
Prestowitz, a former U.S. trade negotiator, has been quietly advising Semi-Gas employees who are working against the sale.
Lorenz founded the company in 1980. In 1983, when he needed more venture capital, he sold 20% to Hercules. He also gave Hercules an option to purchase the remainder of Semi-Gas within five years--an option Lorenz admits he never thought the larger company, which makes graphite and carbon fibers and food and fragrance additives, would exercise.
At the same time, many others in the wide array of companies that supply chip-making materials and equipment had found their “patient” money, even new parent firms, across the Pacific. And because their fortunes were tied to those of the chip makers, the suppliers increasingly went to Asia for customers. U.S. dominance of the global market had faded.
In mid-1988, when Hercules bought Semi-Gas, it was profitable and the leader in its market. That made it the perfect choice, a few months later, to supply the gas-purification and management systems for Sematech, the industry- and government-supported consortium designed to revitalize U.S. chip-making technology.
But a year later, Hercules decided to scrap its venture into electronics. Semi-Gas was one of three subsidiaries put up for sale. Its dominant position--25% of the world market and about half of the U.S. market for its large, expensive products--attracted several bids. One came from three Semi-Gas executives, including Lorenz, backed by British Oxygen.
But as in so many other arenas these days, the highest bid came from Japan. Nippon-Sanso is a natural gas company that counts among its customers some of the biggest names in electronics and chip making, including Fujitsu. Although Hercules declines to confirm the figures, insiders say Nippon-Sanso’s bid was $23 million, 20% higher than the management-British Oxygen bid, which was also heavily leveraged.
What makes Semi-Gas valuable to the Sematech venture also makes it attractive to the Japanese. As chip makers try to pack more and more onto their already incredibly miniature and complex silicon chips, purity and precision are crucial. Even microscopic impurities act as boulders to block the chip’s delicate circuitry, and gas used in the process must be exceptionally pure.
“Nobody can do anything that compares with Semi-Gas in gas delivery systems,” said Joe Stroop, spokesman for Sematech. Stroop said Semi-Gas’ participation has been critical to the third and final phase of Sematech’s five-year mission: to design a manufacturing system for memory chips whose circuits are 0.35 microns wide--a size 5/1,000 the width of a human hair.
Losing the participation of Semi-Gas, Stroop said, would deal a six-month blow to the Sematech efforts--a serious threat because the consortium’s charter, and funding, expires in 1993. And if Nippon-Sanso bought Semi-Gas, the company would have to drop out of the consortium: Sematech’s charter bars foreign-owned companies from being members or suppliers.
Sematech has warned Hercules and Nippon-Sanso that technological information used by Semi-Gas to develop the systems for Sematech is proprietary and cannot be transferred to a new owner without “our written permission. And we’re not likely to give our permission if the new owner is foreign,” Stroop said.
More than half of Semi-Gas’ customers are Sematech members and, said a Semi-Gas official, some have warned they would turn to another American company if the sale is approved.
But U.S. chip makers might have little alternative to doing business with Semi-Gas after it is folded into Nippon-Sanso’s American company, Matheson Gas Products of Secaucus, N.J. Matheson’s main business is gas, but it also competes with Semi-Gas in gas-handling systems. Together, they would control about 65% of the U.S. market--a fact that spurred the antitrust review. The review may continue for months as the companies respond to Justice Department requests for vast quantities of market-share data.
Perhaps more important to Nippon-Sanso is the added edge Semi-Gas would give it in the worldwide market; the fastest-growing sectors are outside the United States. Matheson officials declined to discuss the deal.
“If Nippon-Sanso gets Semi-Gas,” said one executive of the San Jose company, “it is doubtful any American company would ever dominate gas handling again.”
It is just such a situation that worries many in the U.S. chip industry.
Haggerty, who lobbies for Semi/Sematech, an organization of Sematech suppliers, said her group would like to see a “moratorium on foreign acquisitions of these companies that are important to strategic defense.”
William Reed, president of the trade group Semiconductor Equipment and Materials Institute--which has an international membership and does not oppose the sale--said the relationship between chip makers and their suppliers must grow more intimate as the semiconductor devices become more sophisticated and the demands for precision are greater.
“That’s why the Japanese have so much success: They learn when the two groups work together they develop better products at a faster pace,” said Reed. “And it is one of the strong reasons for the success at Sematech. It dawned on them (U.S. chip makers and suppliers) that they need to get together.”
The fear is that with the leading companies in foreign hands, U.S. chip makers will be shut out of technology advancements.
Too, the majority of the materials and equipment companies are small, with annual revenues of less than $10 million. That makes them all vulnerable to foreign money, said one critic of the sale.
If the sale to Nippon-Sanso falls through, Semi-Gas executives might again turn to foreign money. They said they may try to put together a new deal, with British Oxygen backing.
While Reed agrees with the government’s free-market policies and open door to investment, he also said it is vital for the United States to have an independent semiconductor industry.
“The U.S. government should create an environment that would enable our semiconductor customers to survive in this race,” he said, citing oft-repeated industry calls for more favorable tax treatment. “If our customers were healthy, the equipment and materials (companies) wouldn’t be in the shape they are today.”
