Align-Rite Finds Spot for Itself as an Upstart : Manufacturing: Burbank company’s stock offering signals its arrival in the highly competitive market of producing high-tech photomasks.

CEO Jim MacDonald says it’s just tenacity that kept Align-Rite International Inc. chugging ahead as rivals on every side closed shop or got swallowed by big conglomerates.

That tenacity has earned the newly public Burbank company a seat at a very exclusive table. Following a massive consolidation of its industry, Align-Rite is now one of only four independent companies in this country doing significant business in photomasks--a high-tech product critical to the production of computer chips.

Next to the two largest photomask makers, DuPont Photomasks Inc. of Wilmington, Del., and Photronics Inc. of Brookfield, Conn., Align-Rite is a tiny upstart.

Last month, Align-Rite, which claims to have a 10% share of the domestic market in photomasks, filed with the Securities and Exchange Commission to sell 1.2 million shares in a public offering of stock. The move signaled the end of an era in which it struggled to keep a toehold in this market as a private company.

Historically, winners and losers in the photomask industry have been divided among those with easy access to capital, and those without. Competitors such as DuPont have spent hundreds of millions of dollars on acquisitions and technological advancements. And the domestic industry leader, Photronics, with fiscal 1994 sales of $80.7 million, also boosted its position by swallowing smaller rivals, and striking deals with key suppliers.

MacDonald, 48, said large injections of venture capital helped Align-Rite hang in as the industry evolved requiring ever more precise techniques, and more expensive equipment. Founded in 1970, Align-Rite has since opened a manufacturing operation in Bridgend, Wales, which employs about 70 people, and has expanded its Burbank operation, which employs about 130. Net income was $3.4 million in fiscal 1994, nearly double the 1993 profit. Sales were $25.4 million, up from $20.2 million a year ago.

Now, MacDonald said, the company is hoping Wall Street will back its next phase of investment. The public offering of stock, which will result in the sale of shares at an expected price of $12 to $14 per share, will be underwritten by Kemper Securities Inc. and Cruttenden Roth Inc. An additional 600,000 shares will also be offered by existing stockholders. Prior to the offering, about 50% of Align-Rite was owned by its employees and management, and the other 50% by venture capital investors.

MacDonald said about $6.4 million from the proceeds from the offering will be used to buy the expensive equipment photomask production now requires. Another $3.8 million will be used to retire all of Align-Rite’s outstanding debts. And the remainder, about $3 million, will be used for general corporate purposes. The company may also seek acquisitions, although no specific firms are targeted, he said.

A photomask is a high-tech stencil used to transfer a pattern of electronic circuitry onto a silicon wafer. The photomask itself is a see-through quartz material, called a photoblank, which is decked with chrome and patterned in light-resistant materials. Light shone through the photomask leaves a lithographic image on light-sensitive silicon. More than a dozen photomasks are usually needed to make layers of silicon wafers that form a computer chip.

Making a photomask is a tricky, highly technical process: “The images are so small that a slight variation in the width of a line would cause a defect,” explained Gerald S. Fleming, technology analyst with Hancock Institutional Equity Services in San Francisco.

If this seems like more than is worth knowing about the manufacture of silicon chips, consider this: The market for computer chips or semiconductors grew by about 29% last year to 110.6 billion worldwide, and is expected to grow another 23% this year, according to Nader Pakdaman, senior industry analyst with Dataquest. With semiconductors, “everything that needs to go right is going right and is happening in phase with each other,” he said.

Moreover, the booming market for semiconductors is likely to continue for years to come, said Byron N. Walker, managing director of Needham & Co. in New York. “The electronic content in everyday life is increasing, you are finding chips in everything,” he said. Everything from personal computers to refrigerators to the automatic brakes in cars now require integrated circuits, he said. Moreover, the chips these devices require are getting smaller and more complex, and fewer companies have the resources to make them. And custom-made chips, which require their own unique set of photomasks, are becoming a larger part of the market.

Finally, large chip makers are increasingly turning to independent companies to provide photomasks rather than make them in-house. Among Align-Rite’s current customers, for example, is Hughes Aircraft Co., which recently turned to outside sources.

All this should mean continued strong sales for companies that support the chip-making industry. But as recent years have made plain, when it comes to photomasks, it’s not that easy.

For one thing, the industry has suffered from its own success, said MacDonald. In the past, photomask makers tended to make a lot of mistakes, and would have to make several renditions of each set of masks to get it right, he said. Now, the industry has become more efficient and technically advanced, so fewer photomasks are needed. Moreover, advances in the making of photomasks have made their production much more expensive, a key reason small, inefficient producers have been driven out of the market, he said.

Nearly a dozen domestic producers of photomasks dropped out of the business or were swallowed up in the late 1980s. The future shape of the industry is still settling out.

Just this month, DuPont announced it may spin off its photomask division, which did about $150 million in sales in 1994, into a separate public company. And Photronics’ recent announcement that it would acquire a photomask division from the Japanese subsidiary Hoya Micromask last year prompted Align-Rite to protest to the U.S. Justice Department. MacDonald said he is worried that Photronics is gaining too much control over a few key suppliers in the market, leaving competitors vulnerable to supply shortages.

To maintain the steady growth it has enjoyed for 15 years, Align-Rite will have to keep evolving in a market with little room for mistakes: Without doubt, photomasks “are out of their Sleeping Beauty syndrome,” said Dataquest analyst Pakdaman.