Joe Martin had just decided to help with the semiconductor industry’s first leveraged buyout when some peers had a question for him. “They said, ‘Are you out of your mind?'” recalls Martin, now the CFO of Fairchild Semiconductor International, the entity that emerged from the LBO of several former divisions of National Semiconductor Co. in 1997.
In a world full of hot new chips, Fairchild’s product line is far from the leading edge of technology. Other semiconductor companies race to produce the fastest and tiniest microprocessors, or to focus on dynamic random-access memory chips. Fairchild makes “building block” chips, which work with the memory chips and microprocessors to help move and shape information. With lots of jobs for Fairchild chips to do on the circuit board, “we don’t focus on a singular solution,” says Martin, who describes his company’s products as “the parts that go around all those whiz-bangs and allow them to operate.”
Mundane? Maybe. Taken for granted? Certainly. At National, Martin says, “we would hire design engineers for the sexy products, [while] these products were second-class citizens and really didn’t get the capital infusion.” But where others saw a humdrum commodity business, Martin saw great potential. Today, Fairchild’s components are ubiquitous, capable of being specialized for a range of industries–and steadily profitable.
Martin and Kirk Pond, another former National Semiconductor executive who eventually became CEO of Fairchild, wanted to liberate these less-than-exciting businesses. But they first had to convince Brian Halla, National Semiconductor’s CEO, to let go. It wasn’t a hard sell, as it turned out, because Halla was visualizing taking National into the system-on-a-chip technology that was hot at the time, and was open to a cash infusion. Martin and Pond were offered National’s Logic, Discrete, and Non-Volatile Memory divisions. The price: $550 million for a group of operations that produced $690 million in revenue and had 6,500 employees. The operations of Fairchild–a semiconductor pioneer before being absorbed as a subsidiary of Schlumberger, and later National Semiconductor–would be reborn in a new corporate home in South Portland, Maine.
But first, Martin and Pond had to find the money. The two men, who at the time were commuting to Silicon Valley from their homes in Maine, found themselves pitching the LBO idea to skeptical investment firms that seemed to want a more compelling story. “We sat across from people and I said, ‘We’re going to double the company in three years and here’s how we’re going to go do it,'” says Martin. With each polite, noncommittal response, “we’d walk out of meetings and we’d say, ‘The guy didn’t buy it, didn’t believe it,'” he says.
When someone did buy it, though, “it was amazing,” adds Martin.
That someone was Credit Suisse First Boston Corp., which underwrote a 10-year, $300 million high- yield issue, and co-led a $195 million credit facility, with the venture arm of Citicorp providing the equity. And it set off one of the semiconductor industry’s least- noticed successes: a triumph of aggressive financing, smart marketing positioning, and growth that won Martin the 2000 CFO Excellence Award in the Turnaround Management category.
“Nearly everything Fairchild Semiconductor has accomplished in the last three years has Joe’s mark on it,” says CEO Pond. “He has been intimately involved in our market strategy and our growth plan.”
A Prophet of Innovation
After some rough early times– including an identity crisis on Wall Street and a chip-market collapse in 1997–Fairchild today is thriving. It has made several acquisitions, along with two public stock offerings. Operating earnings for the first half of 2000 soared to $153.2 million from $35.5 million, benefiting from the company’s broadening range of products in numerous markets. Annual revenue now exceeds $1.7 billion, and market cap has skyrocketed to more than $4 billion.
Martin himself has become a prophet of innovation for building- block semiconductors, which he would never describe with the dreaded “c” word: commodity. “These are multimarket products that some people like to classify as commodities,” the CFO says. But really, most of them vary, and Fairchild’s “are differentiated from our competitors’ because of either performance, size, or speed.”
Securing this new reputation, though, has meant Martin has had to convince Wall Street that there is beauty in what some see as low-margin banality. While “hotter” chips may have higher gross margins, he points out, they require twice the research-and-development expense and offer shorter product life cycles. Fairchild’s R&D expenses run about 6 percent of sales, and many of its products have a shelf life of more than a decade.
By turning in operating margins on a par with those of the fancy chip makers, however, Fairchild managed to enhance its reputation. And its R&D certainly has been out- of-the-ordinary–with activity that marks a drastic change from the National Semiconductor days. That has led to a dam-burst of new ideas. “As management declined to invest in the product lines, the water level just kept building and building,” he says. “So for us to knock down the dam, it was like, turn ’em loose!” And when the money started flowing, he found “so much energy, so many ideas, so much intellectual property, [and] so much talent.”
Those ideas helped Fairchild fare very well when the bottom fell out of the semiconductor industry three years ago, as did its “multimarket” approach that has broadened its base to include such noncomputer customers as makers of cars, consumer appliances, and video games. The company found itself able to offset price declines, as deep as 20 percent in its Logic segment, by increasing volume and lowering manufacturing costs.
And with the company healthy, Fairchild found the downturn to be an opportunity for some acquisition bargains. In December 1997, it purchased Raytheon Semiconductor for $117 million in cash. With the Asian economic crisis brewing, Martin also kept his eye on Korea. Samsung needed cash, so he pressed it to sell its Power Device division for $415 million, or one times revenue. The deal, completed in early 1999, made Fairchild a serious player in the analog market.
“The Samsung property was never for sale,” says Martin. “I went over there at least a half dozen times prying this thing out of them. Finally, with a little help from their economic situation, things came together. Our competitors died a thousand deaths when we announced the deal.”
Still, when Fairchild needed to float more debt, Martin had to go back to the Street to tell the company’s story again. “You talk about the worst timing in the world,” he says. “Try to convince somebody to lend you another half a billion dollars when prices are crashing and the semiconductor industry is arguably in its worst downturn in history.” Fairchild issued a $300 million bond at 103/8 percent, and got the rest of the funds through refinancing its senior credit facilities.
In Search of Respect
Back in August 1999, Martin helped take Fairchild public at $18.50 a share, raising $370 million. Proceeds went to retire debt. When it did a follow-on offering last January, at $33.44 a share, it raised about $240 million.
Its coffers are still full. As of its most recent quarter, Fairchild had $400 million in cash on hand, and a stock price ranging from $35 to $45 for most of this year. And with its cash, Fairchild will continue to scout for bargains. “We’re going to look for value plays inside of existing, large electronics firms,” says Martin.
But Martin believes Fairchild still lacks the investor respect it deserves. Its shares trade at a low multiple in the mid-teens. “The market still doesn’t understand Fairchild Semiconductor,” continuing to think of it as a commodity supplier, he says. “So part of our job going forward is to convince, to educate, to articulate who we are. And more important, who we aren’t.”