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THIRD AVENUE FUNDS'
MARTY WHITMAN ET AL.
(continued from preceding page)
OlD: In effect, when the major chip makers say jump, the equipment makers say, "How high?".
Jensen: Exactly. The major chip makers call the tune - dictating allowable turnaround time and everything else. And, in fact, by reducing the allowable turnaround time, they've put even more pressure on the equipment vendors.
Plus, there's a critical mass issue. Tool makers have to be able to service their customers around the world, seven days a week, 24 hours a day 365 days a year.
OlD: You sound like you're making the case for Applied Materials again.
Jensen: We think most of our companies have that capability. too. However, it is something to be aware of. There are hundreds of tool vendors - many of whom make essentially the same tool. And there isn't going to be a need for the third, fourth or fifth player at some point.
The ultimate irony may be that the chip makers have gained all kinds of efficiencies because of enhanced output resulting from improvements in semiconductor equipment. One of the things that's been hurting the tool makers is "die shrink" - where they shrink the geometries of a given wafer and chip. As a result, they get more chips per wafer which increases the volume of chips they can crank out using the same number of existing tools.
OlD: And therefore, there isn't an absolute correlation between the unit volume of semiconductors and the ultimate demand for semiconductor equipment.
Jensen: Exactly - although, again, we expect growth to be explosive long term nonetheless both as a result of higher volumes and continuing technological advances.
HERE'S A DOMINANT PLAYER AT 4-1/2X PEAK EARNINGS.
OlD: What would it take price-wise to make you sell - 2 times post-recovery revenue?
Whitman: I doubt it. What would make us sell (and fast) is if we detected a permanent impairment of capital. And that's going to happen to quite a few of 'em.
OlD: Is there a price at which you would consider these things fairly priced - relative to their revenues or anything else - in, say, the good part of their cycle?
Whitman: I don't know. It would depend in part on the merger and acquisition environment. All I know is that as long as they keep their strong cash position, most of those companies' stocks are trading nowhere near a price at which we'd even think about selling 'em today relative to their book value, net asset value or prior peak earnings.
OlD: So their sales and earnings are depressed along with their stock prices. What kind of valuations did these companies tend to sell at in the good times?
Jensen: Probably 2 to 3 times revenues during the good, old, frothy days.
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