Soaring R&D costs may lead to more industry consolidations


BILLERICA, MA-Slow growth in the semiconductor industry, combined with rising research and development costs, may make the recent Mykrolis Corp./Entegris Inc./Extraction Systems merger more the norm than the exception for contamination-control companies.

Jean-Marc Pandraud, president and chief operating officer at Mykrolis Corp. (, calls his company’s merger with Entegris, Inc. (Chaska, Minn.; and Extraction Systems (Franklin, Mass.) an invoking of “the rule of three.” When a market matures, the ultimate corporate survivors become either large players or confined to a niche. The top three vendors command most of the market, Pandraud explains, while others cling to a few percent of the remaining total. Any company in the no-man’s land of in-between quickly moves up, down, or out.

“When you have three major suppliers of a dedicated tool, there is not much room for a fourth or a fifth one already,” says Pandraud, alluding to an ongoing consolidation of semiconductor tool vendors.

Ironically, the “rule of three” that prompted the merger isn’t part of the new market where the combined Entegris-Mykrolis-Extraction will live. “In the subsystem area, which we are operating in, there is no such thing,” says Pandraud. “Today, there are still a lot of suppliers.”

Still, it’s clear that the companies’ management expects industry consolidation-and fairly soon. That’s a view shared by Gartner Dataquest (Stamford, Conn.; Principal Analyst Dean Freeman, who predicts that a winnowing-out will happen because of soaring research and development expenses. Companies have to be large enough to support the cost of developing and delivering new products to a few worldwide semiconductor players, Freeman says. Consequently, there’s a need to merge.

And there’s another reason: slower growth. Freeman and other analysts note that the semiconductor industry had a 15+ percent compound annual growth rate (CAGR) before 1995. There’s some dispute about what the number’s been since then, but most estimates put it in the 8 to 12 percent range. Looking forward, Freeman says, growth appears to be even lower. Although a 10-or-so percent CAGR isn’t anything to dismiss, it is substantially less than what was the norm.

“As a result of that slowing growth, you’re going to see firms that either need to consolidate to compete, or choose to go out of business,” predicts Freeman.

While agreeing that slower growth is here to stay and that the semiconductor industry is maturing, other analysts point to different reasons for consolidation. G. Dan Hutcheson, an industry analyst with VLSI Research, notes changes in the equity markets. He says that technology companies, a category that includes chipmakers and the companies that support them, are now sometimes deemed less valuable than firms that run national coffee shop chains. That makes it easier for one technology company to buy another.

There’s also the impact of new regulations. Hutcheson points to the Sarbanes-Oxley Act in particular-an auditing and financial accountability law approved by Congress in 2002 to protect investors by improving the accuracy and reliability of corporate disclosures. Hutcheson says the cost of compliance for many companies can be substantial, spurring some to seek mergers and acquisitions.

For the contamination-control industry, one effect will be a wave of ongoing consolidation. Hutcheson sees the emergence of a very limited number of suppliers in a whole host of areas. Entegris, for example, is today almost the only provider of FOUP pods-the latest in wafer carriers.

Hutcheson notes he’s seen a similar scenario played out before. “In a lot of the materials markets,” he says, “there’s been so much consolidation that there’s either an oligopoly or a monopoly, and the pricing’s pretty fixed.


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