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QPC's Demise Heralds Consolidation

In early November, QPC Lasers filed for bankruptcy and became the first direct compound semiconductor casualty of the 2008 global financial crisis. Is this a sign of things to come, or an isolated incident, wonders Michael Hatcher.

Like 1929 and 1987 before it, 2008 will go down in history as a momentous year for stocks – and for all the wrong reasons. But what will be the real effect on the compound semiconductor economy?



Ask around at the moment, and the most common response that you get is "it s too early to tell". Put simply, if Nokia isn t sure how many phones it will be shifting next year, then RF Micro Devices won t know how many power amplifiers to manufacture. Go down the supply chain to suppliers such as IQE and AXT, and the crystal ball becomes more murky.

While it might be too early for some, it is certainly too late for one company. QPC Lasers, which manufactured high-power laser chips at its MOCVD facility in Sylmar, went to the wall in early November when senior creditor Finisar called in a $5.4 million debt through a repossession order.

Will this be a sign of things to come? No doubt there are some in the compounds community who are at risk – as in the wider world, the companies with high levels of debt and weak balance sheets.

But the good news is that many of the companies regularly covered in these pages are substantially debt free. In fact, the positions of these companies could end up being very advantageous if, as seems likely, a mood to consolidate emerges from the credit-crash gloom. Of the public companies listed on US exchanges, none of Cree, Bookham, TriQuint, Emcore or IPG Photonics shows significant long-term debt on the balance sheet.

Of those that do show larger debt positions, such as RF Micro Devices and JDSU, the terms of these debts do not appear to pose any short-term risks.

The most notable change among the GaAs manufacturers is the sudden volatility in market share that has resulted from Anadigics lack of focus. The New Jersey company s inability to meet the previously rampant demand for its popular chips has already seen CEO Bami Bastani ejected, along with 100 employees – 15% of the workforce.

To his credit, stand-in Anadigics CEO Gilles Delfassy did not hide behind macroeconomic trends in the company s recent trading update, going on record to say that the chief reason for missing its financial target was entirely of Anadigics own making.

It had been through a spell of stellar growth between 2006 and 2008, but with companies like Intel demanding more and more of the multi-band power amplifiers and high-spec front-end modules in which Anadigics specializes, the failure to meet that demand has come at a damaging cost.

RF Micro Devices and Skyworks Solutions both say that they have gained market share in the aftermath of this slip-up. Meanwhile, Anadigics share price – which had been one of the best performing among compound semiconductor stocks since 2005 – has collapsed. Even accounting for the general stock market carnage of 2008, the company has suffered in comparison with its peers (figure 1).

Anadigics balance sheet shows $38 million in long-term liabilities. But even when added to the $15.5 million loss from its latest quarter, the $130 million cash and cash equivalents that are also listed on its most recent balance sheet should provide a buffer.

Skyworks, perhaps the greatest beneficiary of Anadigics difficulties, used some of the $111 million net profit that it made in the fiscal year ended October 3 to reduce its own debt exposure. The Woburn-based company retired $62.4 million in convertible long-term debt on its balance sheet, reducing that liability to $137.6 million.

One company where existing liabilities might pose more of a problem could be equipment provider Aviza, which is exposed to a $12.3 million long-term debt. Certainly the stock market appears to think so, dragging the company deep into the realm of penny stocks over the past 12 months. Now facing almost certain expulsion from the Nasdaq index, which does not allow shares to trade below $1.00 for an extended period, the market capitalized Aviza at a measly $3.5 million on November 7 ($0.16 per share).

With such depressed valuations, the industry ought to be ripe for some serious consolidation – driven by the companies with little or no exposure to debt. In the fiber-optic component sector, which many believe still supports too many chip manufacturers, that consolidation might be imminent.

For those brave enough to take the risk, there are some rich pickings on offer.

  

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