INDUSTRY NEWS

Industry greets KLA-Tencor merger with insouciance

Did the recently announced merger of KLA Instruments and Tencor Instruments—creating a one-stop shop for yield management products and services—have an air of, perhaps, inevitability about it?

When you mention that notion to Kenneth Levy, KLA's chairman and CEO, he pauses for a second and chuckles before replying. "It was a very good idea. But sometimes very good ideas are not inevitable. It made a lot of sense when we were talking to our customers about it. The customers all agreed that this is in their best interest."

Industry analyst Dan Hutcheson, president of VLSI Research, dryly terms the merger "intuitively obvious." He recalls receiving a phone call minutes after the alliance was announced on January 14. "When I was first told about the whole deal my response was, 'Oh, OK.' The caller asked, 'That's all you have to say?' My reply was, 'Yeah, what more do you say? It's not a surprise. Especially with the Applied situation.'"

Applied Materials made a splash in December when it entered the metrology and inspection market with the purchase of two Israel-based companies, Opal and Orbot Instruments. Orbot's products for wafer-defect and reticle inspection directly target both KLA and Tencor, and Opal's CD-SEM system competes with KLA product. Jon Tompkins, Tencor's chairman, president, and CEO, points out: "We had started our merger discussions prior to the Applied announcement. Clearly, though, the announcement didn't slow our process."

KLA and Tencor, of course, tried to hook up four years ago. So what made the deal, which is valued at $1.3 billion, attractive this time?

"When we got into protracted due diligence four years ago it was pretty obvious there was a difference in culture between the two companies," acknowledges Tompkins, who will become CEO of the new company with Levy as chairman of the board. "Today, both companies are bigger and more mature. Also, the industry has changed. The cultures of the two companies are more similar. We were a $50-million-a-year company four years ago and entrepreneurial. We're not quite the cowboys we were then."

Shortly after the announcement Tompkins, Levy, and other top executives from both companies fanned out in small teams across the United States to speak with chipmakers. The Tencor head says that between the two vendors "we had a serious dialogue with at least 18 U.S. semiconductor companies. We've pretty much covered the waterfront."

Tompkins says that the meetings had a threefold purpose: "We wanted to explain the deal so that there was no misunderstanding about the merger itself. We wanted to show that it's a merger of equals as opposed to a 'PacMan' attempt where one side gobbles up the other. The second goal was to describe the benefits of the merger, and the third was to answer any questions."

As he and his team explained it to customers, the deal has "three major benefits." The first is that by combining product lines that are largely complementary "we're going to be able to offer our customers a better overall yield management solution." The second plus is that the merged firms can eliminate overlapping R&D costs and "redeploy" those resources to focus on meeting the requirements of SIA's technology road-map in such areas as the 300-mm wafer transition and the measurement needs for 0.25-µm processing. And the third is that field support will expand.

The executive estimates that KLA-Tencor, as the company will be known, will have a total of more than $100 million in additional R&D funds available to the enterprise over the next four to five years, based on combined yearly revenues of $1.1 billion. "That could be the difference between meeting a critical roadmap milestone and not meeting a critical milestone."

"All the customers I talked to were shaking their heads up and down as opposed to sideways," Tompkins recalls. Asserts Levy: "Most of our customers recognize that by merging the two companies we'll be able to do a better job for them. That's their major concern. Can they put together a system that helps them ramp up their yields and keep them high over an extended period? Working together, KLA and Tencor will be able to interconnect all of this equipment to do just that."

Asked to cite an example of these efficiencies, Levy replies: "At KLA we have been working for a long time on doing software integration of information sources. When we go back to analyze the final yields what we would like to know is, what was the defect level at every step along the way? What were the film thicknesses that controlled the parametric data? And what was the quality of the reticle? So when we combine the capabilities of KLA and Tencor it will be easier for us to integrate the data from all these steps."

Tencor, Levy notes, has measurement capability at about half the steps and KLA equipment "measures the other half. So, together we'll have the ability to measure almost all of the critical process steps."

Except for the wafer inspection area, much has been made of the fact that there is little overlap in the vendors' respective product lines. Levy was asked whether any particular product will be phased out. "There are probably 20 points in the process where we inspect the wafer for defects," he replies. "As it turns out, the Tencor technology is extremely good for planar films. Our technology is good for high-topology steps. So today most of our customers have both Tencor and KLA equipment on the process line together. The customers choose the steps where they deploy each piece of equipment, and so we expect to see very little change in that regard after the merger."

Says Tompkins: "The fact is, if you go into virtually any semiconductor fab today you will see wafer-defect inspection systems, and you will see Tencor Surfscans for contamination analysis, and, in some cases, defect monitors as well. Customers are used to buying a mix of products from the two companies. Rarely do you have the case where one system is substituted for another."

Hutcheson of VLSI Research argues that the "world tended to view both companies as archcompetitors." The vendors themselves "had this very competitive mentality," but when you visited customer sites you saw exactly what Tompkins described in terms of tool distribution. "It was almost like Mercedes-Benz and GM competing," says Hutcheson.

Although the merger is being treated as a fait accompli, both Levy and Tompkins emphasize that the deal must comply with U.S. government antitrust regulations. Both executives see this approval as a formality. Says Tompkins: "We had advice of counsel from both sides that this was not a problem from an antitrust standpoint. We entered into the transaction assuming that would be true. The government's a bit of a wild card. I think the issue with the U.S. government is not whether the deal meets their requirements but how quickly they will come to that conclusion." Tompkins expects the merger to be completed by the end of June.

Hutcheson agrees that the only possible snag involves questions of competition in the marketplace. "How does this merger affect the competition, from an economic standpoint? If there's reduced competition in a significant way, should [the merger] be blocked?"

The answers to these questions may lie in how you define the market, the analyst points out. Do you define it as the semiconductor equipment market, in which case KLA-Tencor would represent 2 1/2% of the combined market compared with Applied Materials? If you define it as the process diagnostic market then KLA-Tencor would have about 35% of the total pie, according to Hutcheson.

Given Applied's obvious clout, a KLA-Tencor alliance "may not be that anticompetitive," the analyst says. "It may be the sort of thing where the market is consolidating in any case, and this is the only way to keep competition thriving. Obviously, you're going to decrease competition if all things are static, but if the market is consolidating anyway then you face the fact that it may be the only way to preserve competition in the market."

According to Hutcheson, chipmakers should welcome the merger. "The customers generally favor less competition in this market because it's a market that's highly fragmented. And that makes for more costs and inefficiencies."

"Generally, I think it's probably a positive for the typical fab engineer," concurs analyst Brett Hodess, managing director of Montgomery Securities. "You have to deal with only one guy if you're looking for just one solution to track yield."

Officially, Applied has taken the announcement in stride. Jerry Taylor, senior vp and CFO, points out that the front-end equipment supplier anticipated "what the probable reaction of the competition would be" when Applied was planning to purchase Orbot Instruments and Opal.

Says Taylor: "We don't think it changes very much in terms of our ability to compete in the marketplace. The customers are clearly looking for another alternative to KLA and Tencor. We don't believe there is tremendous leverage there. It does make them bigger." Applied, he adds, has a "lot of respect for Tencor and KLA." However, the CFO emphasizes that his company "will be a formidable competitor to them."

Nanometrics, another competing firm, foresees little negative effect on its business, according to Robert Buchanan, director of marketing. Among the reasons: roughly 50% of Nanometrics' sales in 1996 came from three Nanospec tabletop systems; KLA does not necessarily improve its position in thin-film metrology; Nanometrics has products in the FPD industry while Tencor doesn't; Nanometrics also has established a foothold in the 300-mm wafer market; and the company "has done quite well" selling production tools to the magnetic recording head business, where it seldom sees Tencor.

"We've just received an order for close to $3 million from a Korean company," crows Buchanan. "That was a really head-on situation with Tencor bringing in representatives from KLA" to help make the sales pitch. According to Buchanan, the market research firm Dataquest projects the worldwide thin-film market to grow substantially from $209 million in 1996 to $418 million in 2001. "I think we'll continue to get our share of the market," he asserts.

Tompkins says that during the site visits customers "jumped on the benefits pretty clearly." The clients expressed no misgivings about the effects of the merger, although the executive notes that "they are telling us that Tencor has to behave as it has in the past. There's a general perception that we're a little easier to work with than KLA. We had to make them feel comfortable about that."

Typically, Tompkins points out, "the culture of new, combined companies is not the same as the culture of the original companies. There's going to be some melding and some give-and-take."

Hutcheson credits Tencor's successful merger with Prometrix three years ago with creating a positive atmosphere that made the KLA-Tencor alliance possible. "That's one of the few acquisitions that has worked." In Hutcheson's view, the deal has one notable characteristic. "I think the only impressive thing about merging two companies of this size with two CEOs as dynamic as Tompkins and Levy is you've got to get over all the ego issues."

(Editor's note: Because of the merger, Tencor Instruments has placed its proposed acquisition of Ultrapointe on hold and has not completed the purchase as reported in the February issue of MICRO. Tencor will continue to sell Ultrapointe's line of defect review tools on an OEM basis under the terms of its three-year agreement with the San Jose­based vendor.)

MicroHome | Search | Current Issue | MicroArchives
Buyers Guide | Media Kit