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THIRD AVENUE FUNDS'
MARTY WHITMAN ET AL.
(continued from preceding page)
OlD: And yet it looks like either their cash balances and book values are declining or growing, if you will, in the wrong direction...
Whitman: I don't think so. Most of the companies we own are managing to be cash flow neutral. But even if industry conditions do worsen and these companies start to burn cash at a very high rate, our hurt may be minimal. When you're in well capitalized companies, if they do start to dissipate, you usually get a chance to get out. On the other hand, when you're in poorly capitalized companies, you better watch the quarterly reports very closely.
OlD: I strongly resemble that remark.
Whitman: It's always possible that our companies cut back too much. We keep telling 'em we don't want 'em to do that and they keep stroking us. Most of 'em tell us they're maintaining R&D. But I don't necessarily believe it because they are in a very severe depression and they're probably getting another message from the other analysts. So a lot of 'em play the quarterly earnings game.
Jensen: Although R&D cuts tend to be a last resort.
Whitman: On the other hand, a bigger risk even than cutting back too much on R&D may be cutting back too much on customer service...
OlD: Customer service?!
Whitman: Customer service. If you're not a supplicant to Intel, they'll boot you from here to...
OlD: Please! We want to maintain our PG-17 rating. But it sounds like most of these companies only have their business through the good graces of the semiconductor companies - and that their revenues are subject to termination almost at whim.
Jensen: It is something of a contracting industry where these companies are supplicants. For example, one of the next big technological advances in the industry is the upcoming transition from the current 200-millimeter, 8-inch wafers to 300 millimeter, 12-inch wafers. And that move will require very expensive retooling.
OlD: Sounds good for the equipment makers.
Jensen: It is - over the long term. However, roughly twelve months ago, the major chip makers like Intel told the equipment vendors to have next-generation, production-ready tools ready for testing within six months. So these companies raced to develop next generation tools.
But then, all of a sudden, Intel and IBM said, "Oh we're not quite ready for those tools yet. In fact, we probably won't need 'em until after the turn of the century. So maybe you don't need to rush after all."
However, meanwhile, these tool companies had been spending money like crazy - incurring additional expenses and putting off other projects in the process.
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