CP Clare Corp.'s decision to sell off its electromagnetic unit has executives at the Beverly, Mass., company anticipating more prosperous days, but market observers and investors still are somewhat dubious as to the results this latest move might yield.
With the divestiture of that unit, called Clare EMG Inc., and its related products, CP Clare will complete a four-year metamorphosis that has turned it from a commodity-component supplier into an analog and mixed-signal semiconductor outfit locking in on the burgeoning communications and computer-networking markets.
The company last month agreed to sell Clare EMG to Japan's Sumida Electric Co. Ltd. for $36 million in cash. The transaction is expected to be completed by the end of this month.
Clare EMG consists of an advanced-magnetics division; legacy reed-relay and surge-arrester businesses; manufacturing operations in Guadalajara, Mexico; a purchasing office in Taiwan; and a facility in Arlington Heights, Ill. Together, Clare EMG's products represent $55 million in annual revenue, about a third of the company's total.
Shedding those businesses is in line with CP Clare's initiative to become a volume supplier of high-voltage analog and mixed-signal ICs.
Beginning with an initial public offering in 1995, CP Clare has beefed up its focus on and its capacity to build semiconductor products. Since then, it has built a 5-inch-wafer fab adjacent to its headquarters in Beverly, and acquired Micronix Integrated Systems Inc., an Aliso Viejo, Calif., supplier of analog and mixed-signal ASICs.
However, industry observers are still waiting to see that strategy come to fruition. For the fiscal year ended last March, CP Clare's gross margins slipped to 28.5% from 31.3% the year before, and the performance of its Nasdaq-listed stock has been sluggish, at best.
"The strategy makes sense, but there are still some questions as to how successful they will be," said Mark Grossman, an analyst at S.G. Cowen Securities Corp., Boston.
"The businesses they're exiting are largely mature, commodity-type businesses," Grossman added. "If they held on to them, they would have slowly declined. They didn't have the sort of long-term growth prospects that you would like in a semiconductor company."
Indeed, investors have not looked favorably on CP Clare's stock recently. While there was a sharp spike in the price of CP Clare shares when word of the Clare EMG divestiture hit the Street early last month, they were only teetering between $6.50 and $7 last week, still well shy of the company's book value of $9.12 per share.
But that could change, depending on CP Clare's ability to channel the resources freed by the divestiture of the Clare EMG unit into bringing to market new, higher-margin products, Grossman said. And that's precisely what CP Clare intends to do, according to Arthur Buckland, the company's president and chief executive.
When the deal is completed, CP Clare will not only be recapitalized, but also better able to concentrate its efforts on developing products for the home-networking, DSL, and cable-modem markets, he said.
Excluding Clare EMG, CP Clare's new-product introduction schedule over the next 12 months comprises 17 devices, and the company will target the bulk of its efforts on just a few of those, according to Buckland. "This gives a real focus to the business, and the focus is all around taking out five or six of those new products and making them very successful," he said.
In addition to reducing the number of parts the company manufactures, CP Clare's employee base will be reduced to a mere 450 from 1,770 after the divestiture. The proceeds from the sale will also help CP Clare fill out its current library of intellectual property, giving the company the ability to use cash to acquire the IP it is lacking, Buckland noted.
This winter, CP Clare will start rolling out some of the new products it is developing in the computer-networking space, but Buckland said he does not expect them to render any solid financial results until they begin to sell in volume, which would likely be about a year after they are introduced.
And despite the cost reductions resulting from the Clare EMG divestiture, Cowen's Grossman said he still expects to see the company posting less-than-stellar financial statements for some time.
"I think the next quarter or two, in terms of earnings, are still going to be weak," Grossman said. "It's more a question now of whether they can turn this thing around in 2000. They have some products that they hope, toward the end of the year, will start kicking in, and their fab is still only operating at around 25% of capacity. If they're able to fill that fab, then there could be huge market improvement."