Persistence paid off for Microsemi Corp. Chief Executive Jim Peterson.
A few weeks ago, Peterson struck a deal to buy local rival Semicoa Semiconductors Inc. of Costa Mesa for $25 million.
It was a deal that was eight years in the making for Irvine-based chipmaker Microsemi, he said.
Peterson said he made it a habit to call and check in with Semicoa founder and former chairman Mark Kalatsky every quarter.
“I asked him how business was going, what was his exit strategy and when,” Peterson said. “A few times we actually sat down. But he said he didn’t want to sell.”
Kalatsky is in his early 70s and ran the company for more than 40 years before handing it over to then-chief executive Perry Denning a few years ago.
At some point, Kalatsky had a change of heart.
“As recently as the first week of June, I called with the same question,” Peterson said. “But this time he said he was feeling his age and wanted time to work on his own research. I caught him in a moment where he and his wife must have just had one of those talks.”
Peterson decided to strike while the iron was hot and made an offer.
After the deal wrapped, “I told Mark to go take a vacation,” he said.
A steady supply of military and aerospace contracts has kept Microsemi in favor with investors during a time when other chipmakers are floundering.
Shares are up some 12% since the start of the year on a recent market value of about $2 billion.
“We are not recession-proof by any means but we are pretty resistant,” Peterson said. “One thing (President) Bush has certainly done is he’s spent enough for the next two election cycles, regardless of who’s in charge.”
Stable Business
Microsemi is benefiting from big government spending on programs to update and launch the next generation of satellites, radar, communications devices and weapons for the military.
The good outlook on defense dollars is one reason Wall Street’s been bullish on Microsemi.
“Microsemi is positioned as a dominant player in lucrative niche markets with high barriers to entry within the defense, aerospace and medical industries,” said Blake Fischer, an analyst with St. Louis-based Stifel, Nicolaus & Co. “We believe these markets are posed at the beginning of a sustainable multiyear expansion phase.”
Another plus is that its business is stable and its prospects aren’t likely to change dramatically from quarter to quarter.
“You can think of the company as a big battleship,” said Rick Schafer, an analyst at Oppenheimer & Co. in New York. “It sets the course and goes. You know it won’t turn on a dime.”
Microsemi and Semicoa make what industry insiders call “high reliability” chips, which go into devices that need to perform under extreme conditions in which failures can be very costly.
“We have a lot of the same customers and same products,” Peterson said. “The beauty of the deal is that the company fits in so nicely with Microsemi. About 70% of our products overlap.”
Both sell chips to nearly the same group of top defense contractors, including Northrop Grumman Corp., Lockheed Martin Corp., Boeing Co., Raytheon Co., General Dynamics Corp. and Honeywell International Inc., among others.
The buy also gives Microsemi an easy way into a new market.
Roughly 35% of Semicoa’s sales are chips that go into “smart munitions,” or weapons that are guided by sensors and other technology.
Semicoa, which was private for all of its 50-year history, had yearly sales of about $12 million at time of the sale.
Attracted to Equipment
Another big reason for the deal: Microsemi wanted the brand-new equipment in Semicoa’s chip plant.
“What I wanted was the assets,” Peterson said. “They ran a very clean operation and did a tremendous job.”
Last year Semicoa spent more than $4 million to overhaul its factory in Costa Mesa.
It doubled the size of its clean rooms, tightly-sealed areas where workers are sanitized before handling sensitive equipment.
It also upgraded and installed new “burn-in” equipment, machines that rigorously test chips before they go out to customers and help to weed out any bad chips.
Microsemi is set to dismantle Semicoa’s 47,000-square-foot plant and move the bulk of its chip fabrication equipment to a Microsemi site in Ennis, Ireland, where it’s cheaper to do business because of more favorable taxes.
The burn-in equipment is set to be broken down and flown to Ireland in pieces over the course of a year, Peterson said.
Kalatsky still has a two-year lease on the site. It’s unclear what he’ll do with it once the move is complete.
Microsemi plans to cut about 60 Semicoa jobs by October.
A few manufacturing workers may get jobs at Microsemi’s Garden Grove chip plant, but the bulk will lose their jobs, Peterson said.
Microsemi, which has yearly sales of about $500 million, is set to continue to be a consolidator in its industry.
In January, it paid $2 million for TSI Microelectronics Corp., a small maker of high-reliability chips for the defense industry.
In November, it bought the assets of Westford, Mass.-based Microwave Device Technology Corp., a microwave chipmaker, for $7.8 million.
Semicoa had lots of other suitors, Peterson said.
“At the end of the day, Semicoa’s business overlapped so nicely with Microsemi’s and the other suitors were just wannabes. They wanted to be in military and defense because all of a sudden it’s in favor,” he said.
Kalatsky had promised Peterson long ago that Microsemi “would get the last look at the very least,” he said.
Kalatsky is set to stay on as a part-time consultant.
Peterson said he wants to learn about the manufacturing techniques Semicoa uses and about Kalatsky’s research in chips that go into optical devices.
“Mark always claimed that his manufacturing systems were better than ours and we always said that ours were better. Now we will know for sure,” he joked.
Peterson downplays the rivalry the two shared.
“I knew he was there and he said, ‘I’m making money in your shadows, Jimmy,'” Peterson said. “It was mutual respect.”
