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THIRD AVENUE FUNDS'
MARTY WHITMAN ET AL.
(continued from preceding page)
Lie: They're similar in size to Applied Materials...
Jensen: Which is the largest in the world.
Whitman: Those two Japanese firms are big mothers. For example, Tokyo Electron has sales of ¥455.6 trillion which, at prevailing exchange rates, is over $3.92 billion.
Jensen: But the revenue figures for Tokyo Electron and Tokyo Seimitsu are somewhat misleading because they have other businesses besides semiconductor equipment.
OlD: On the subject of competition, "Value Line" says Applied Materials has tended to gain market share during tough times such as today's because of their high R&D outlays and conservative footing.
Lie: That's their strategy. And they've been gaining market share during this downturn in several segments including chemical mechanical planarization.
Whitman: But if someone wants a market that one of these companies has, they can do it in two different ways: (1) They can either enter the market by making something de novo: or (2) by acquiring an existing player - generally at a premium to the market.
And given the pricing, I think the dynamics are going to play out in M&A [mergers and acquisitions] rather than new entrants. If I wanted to compete with C.P. Clare in the analog business, I know that I'd go out and acquire them. Given current pricing, that would make a lot more sense.
Jensen: Plus, one of the ways that these companies can improve their economies of scale is by merging as Speedfam and IPEC [Integrated Process Equipment] just did. So competition from AMAT and other bigger players could drive the trend of consolidation.
Whitman: And again if we're right about the growth, these companies could lose share and still do fine.
AND MASTERS OF THEIR OWN FATE THEY'RE NOT....
OlD: What then could turn these things into mistakes - besides killer competitors, a prolonged downturn or a U.S. dollar that remains overpriced for awhile?
Whitman: What else could turn 'em into mistakes? As you say, the severe industry depression could wind up lasting much longer than we think likely at this point. Also, the strikeout ratio among our companies could always be higher than we expect.
I think the biggest thing that could go wrong would be that contrary to what we expect, the industry doesn't grow. So instead of resembling the auto parts industry, it winds up resembling the textile industry. If it turns out to be a shrinking industry, if the Japanese or the Koreans or someone else runs American companies out of the industry, then we'll be in trouble. There's no question about it.
OlD: In other words, although these companies are selling at very low multiples of trailing peak earnings, they might never see those peak earnings again.
Whitman: You've got it. But other than the things we've touched on, I'm not sure what else could go wrong. One thing that's not very likely to go wrong, in my opinion at least, is for these companies to burn through their cash and become insolvent - at least under current conditions. And that's unlikely for two reasons: First, most of the ones that we own have net cash. Second, the ones we own aren't likely to have a very high burn rate on their cash. So I think that's very unlikely.
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