Whenever a high-tech company needs to make its bottom line look better to shareholders, a quick answer has been to peel off its semiconductor business.
Motorola was the latest to join the trend, announcing last week that it intends to spin off its Semiconductor Products Sector into an separate independent company with its own name and stock symbol.
The sector employs about 3,500 at plants in Chandler and Tempe.
Lots of others have tried the same. Intersil Corp. was created from Harris Corp., Agere Systems was separated from Lucent Technologies, Infineon Technologies was spun off from Siemens AG, and Conexant Systems was formed when Rockwell International Corp. spun off its semiconductor business.
And in 1999, Motorola sold a portion of its semiconductor operations to an investor group to create Phoenix-based ON Semiconductor.
Texas Instruments took the opposite approach, selling its systems business to concentrate on semiconductors, but the end result was the same — the semiconductor business was separated from the businesses that make products that use semiconductors.
In most cases the mother company chopped off the semiconductor business to make its own financial picture look better.
The semiconductor units ran up heavy debts to build expensive chip fabricating plants, and with the economic downturn of the past three years, semiconductor sales have been in a steep slump.
Thus the mother companies have benefitted quickly with higher stock prices.
The fate of the separate semiconductor companies hasn’t been as good.
Most have struggled due the industry’s worldwide recession, and several, including Agere and Conexant, have had to sell off portions of their business, said Will Strauss, president of Forward Concepts, a Tempe-based market research firm. Also some have sold their fabricating plants to cut debts and have been reduced to designing, testing and distributing chips while outsourcing manufacturing.
But their prospects are improving now that a mild recovery is underway, and their stock prices are on the upswing. Strauss said it’s too early to judge the success of the separations, but he thinks many of the new companies will fare well in the long term.
"Our multimedia future depends on those chips," he said. "High-definition televisions and portable anythings are enabled only through progress in silicon."
In the long run, the separation may cause problems for Motorola because much of the company’s know-how is based in its silicon chips, he said.
"They will have other places they can get (chip technology), that’s true, but they won’t be able to dictate the processes and designs with the flexibility they have now," Strauss said.
Another factor that could help the new semiconductor company, and hurt the mother company, is that the semiconductor sector will no longer have to sell chips to other Motorola divisions at a discount, he said. That could improve the operations’ profitability, he said.
"No one thing will make them instantly profitable, but getting the economy moving would probably be the biggest help."
Jim Feldhan, president of Semico Research Corp., a Phoenix-based market research firm, believes Motorola’s semiconductor sector has a good chance of success as an independent company. The separation will give it business flexibility, and it should be easier to sell chips to customers like Nokia that compete with Motorola in other businesses, he said.
"If the semiconductor business is spun off, the playing field will be more level selling to both the old parent and to others," he said.