STMicroelectronics N.V.'s Pasquale Pistorio stood on the sidelines in the late '90s, enduring scathing criticism from puzzled investors and analysts as rivals paid what he argued then were outrageous amounts for acquisitions.
Today, it is ST that is setting tongues wagging with a gaggle of acquisitions, three of them already this year, and all secured at a fraction of what it would have paid three years ago. ST, the world's third-largest semiconductor company by revenue, last week indicated at a meeting of investment analysts that it will keep looking for businesses that complement its IC offerings in the automotive, communications, computer peripherals, and smartcard markets.
"We've made some strategic acquisitions recently and our acquisitions make sense, not the foolish situation of the '90s," said Pistorio, ST's president and chief executive, during a talk in New York.
Since January, the company has bought several businesses, including Proton World International and Incard SpA, a smartcard software and hardware developer in Naples, Italy. In 2002, the company bought Alcatel Microelectronics and the ADSL and HDSL operations of Tioga Technologies. The acquisitions came with dozens of engineers coveted by ST.
"We're glad that we were not the type of geniuses we saw then. We were downright simple," Pistorio said.
ST's simplicity can be deceptive. Through the industry's worst downturn, the Geneva-based company kept churning out profits, albeit at a moderate rate. The absence of acquisition-related charges on its books, its broad product portfolio, as well as solid relationships with key OEMs kept sales humming and helped keep the company in the black.
"It's against our religion to lose money and not to have a strong balance sheet," Pistorio said. "ST did manage to maintain profitability during the last two years while not sacrificing any programs and increasing R&D."
But ST is not without significant challenges. In the first quarter of this year, the company tripped badly when it failed to meet its revenue forecast, citing order delays at key customers. The revenue shortfall elicited concerns from analysts that ST could be facing a tough year because of market uncertainties.
Also, ST's memory group remains under pressure with its NOR flash business battered by pricing weakness even as it tries to enter the fast-growing NAND flash sector through a partnership with Korea's Hynix Semiconductor Inc.
Additionally, the recent appreciation in the value of the euro vs. the U.S. dollar is expected to put a wrinkle in ST's sales in subsequent quarters. However, the company insisted that it is exploring options to limit the impact of currency translations on its operations, including accelerating the relocation of facilities to Asia.
But even this option has its limits, according to analysts.
"One natural hedge that ST can utilize is cost-shifting to areas outside Europe, but of course, the majority of ST's front-end facilities and operating expenses are located in Euro-denominated countries," said William Conroy, an analyst at Sanders Morris Harris, Los Angeles. "The desire to shift costs may be high, but the actual potential is limited."
Pistorio and the heads of ST's major business units last week defended the company's performance, arguing that it has maintained a leading position in core market sectors such as analog and power management ICs, ASSPs, and MPEG decoder ICs, all areas where it is rated the world's No. 1 supplier.
ST's foray into the NAND market in April through an alliance with Hynix raised concerns among analysts that the company could eventually enter the DRAM market, moving it away from its higher-margin application-specific product base, which represented 70% of sales in 2002, according to Alain Dutheil, corporate vice president of strategic planning, at ST.
Carlo Bozotti, corporate vice president and head of ST's memory products group, insisted that the company has no plans to become a DRAM vendor and that it entered the NAND market to avoid being dependent on other suppliers.
The NAND move is part of a long-term trend that ST is using to reinforce its position as an integrated device manufacturer. The company said it doesn't expect to outsource more than 20% of its manufacturing at any time and has put in place a system to make sure that its front- and back-end production facilities can swiftly adapt to different process technologies, according to Laurent Bosson, corporate vice president of front-end manufacturing.
"ST's internal manufacturing costs are on average 40% lower than subcontractor prices, and that's why we put the ceiling on wafer outsourcing," Bosson said.
But it is in the area of R&D where ST has made its most significant strides. The company is helping accelerate development activities at top chipmakers through a series of alliances formed with the goal of boosting product offerings while reducing R&D costs.
Top partners in ST's technology alliances include major IC suppliers and equipment makers and foundries like Dai Nippon, Hynix, Motorola, Philips Electronics, Texas Instruments, TSMC, and UMC.
Between 2000 and 2002, the company rapidly added to its engineering teams in low-cost countries, raising the total in both Asia and low-cost sites in Europe to 37% from 31% while cutting back slightly in the rest of Europe and North America.
This year, ST has already increased the number of engineers it employs in India to about 1,000.
"We'll keep the engineers we have in Europe, but the expansion is going to be in Asia," Dutheil said.