Editorials

Who Might Buy Agilent’s SPG Unit (which co-owns Lumileds), and Why?

Normally we avoid writing about rumors, but this one’s irresistible. Some highly
credible news sources, EE
Times
being the one closest to our business, have reported that Agilent
Technologies is actively shopping for a buyer of its Semiconductor
Products Group
(SPG), which includes the LED
business
that went to Agilent when it spun off from Hewlett Packard, and…
more importantly to our industry, Lumileds Lighting, the JV co-owned by Agilent
and Philips. Agilent, HP and Lumileds have their international roots firmly
planted in the USA, and all remain headquartered in the famed Silicon Valley
in California. Philips is based in the Netherlands. Now the speculation fun
begins. Will Lumileds indeed be part of the deal? Who will be the buyer (or
buyers)? And how would such a shift alter the existing LED manufacturing landscape?

Agilent has evidently recruited Goldman Sachs to handle the sale of the group
and the speculative pricetag could be in the neighborhood of $1.5 billion to
$2.0 billion, according to The Wall Street Journal and Reuters.
EE Times did the math for us and noted that, last year, Agilent’s SPG
unit “contributed $2 billion to Agilent’s $7 billion in revenue. Semiconductor
orders were $435 million during the first quarter of 2005, down 26 percent from
one year ago but up 7 percent sequentially. First-quarter chip revenue, at $450
million, was 5 percent below last year and down 9 percent sequentially. Segment
profit, at $27 million, was $33 million below last year’s quarter on a $24 million
drop in revenue. Sequentially, profit was $19 million higher, despite a $42
million drop in revenue.”

To that we can add that the Lumileds JV, which is physically housed in Agilent’s
SPG LED facility in San Jose, California yielded $280 million in revenue for
FY’04. Philips’ executive VP and CEO of the company’s solid state lighting unit,
Peter van Strijp, revealed in late December that Lumileds’ revenues represented
43% annual growth, and that Philip’s net income amounted to $62 million. These
figures were reported by Philips in December of 2004, and covered as exclusive
headline news in these pages. (Ref: Dec. 23, 2004 Philips
Reports Lumileds’ Impressive Financial Performance for FY ’04
which
includes links to the presentations
). Prior to that, Lumileds’ revenues
had never been publicly disclosed. Since the JV is owned 50-50 by Agilent and
Philips, one could surmise that Agilent scored $62 million
net income from last year and that this is included in the $280 million reported revenue. At the size of the $2.0 billion revenue that the SPG group adds, $62 million starts to look like loose change.

Current metrics are what matter. Agilent’s SPG unit is down in revenue by $12
million and no company can sustain a loss for long in these hard times. So selling
off the loser could make sense to the hard of heart. But… the Lumileds JV
appears to be a winner within SPG, producing good bucks for its parents. Agilent has stayed relatively
quiet all along about how well their high brightness, high power LED offspring
is doing. At the same time, they’ve announced various steps that moves Agilent’s
conventional LED manufacturing prowess into continually closer alliance with
Lumileds’ product line, which shouldn’t be hard, given they’re in the same building.
It seems to me that the LED business, combining Agilent’s conventional LEDs and Lumiled’s HB/HP LEDs, would go for a hefty
price to someone interested in being a massive force in LED manufacturing. If
you have a billion or so to sink into it, you might have something.

Keep in mind that when your JV is a 50-50 partnership and one of the parents
wants to bail out and run with the cash, the other parent has a big say so about
what happens to the kid. Philips may opt for full custody. But they may not
want all of Agilent’s SPG product lines. One of the more interesting lines within SPG is Envisium, which
is the brand name for a line of mid-power LEDs co-developed by Agilent and Lumileds. SPG also sells dot matrix displays, light
bars, segmented and smart displays, surface mount LEDs and through hole LEDs, so a breakup and piece meal sell off might be the course Agilent takes.

When speculating about what Philips might do about Lumileds, its important to remember that
Philips is one of a small handful of true world-class lighting companies. They’re
holding 50% ownership of one of the brightest and best of the advanced (versus
conventional
) LED makers, including all colors, which includes some of the
best of class white LEDs. If you’re starting a betting pool around the office,
it might not hurt to first take a site-seeing trip around Lumileds’
website
to view for yourself what Lumileds brings to the Agilent SPG speculation party. Also, beyond the products lines,
Lumileds has some wonderful people running the shop, led by Mike
Holt
and backed by an extremely talented technical staff. They’re all rather
HP-like (hip and patient) in the fine tradition of that once great Silicon
Valley leader. And if Agilent sold its share of Lumileds to anyone, they’d have
to factor in that the man who conceived of Lumileds in the first place was George
Craford
, who continues to serve as CTO. The inclusion of George in a sale
would require declaring him a national treasure.

Then there are all those Asian companies with deep pockets to consider as potential
buyers. Asians already hold most of America’s debt, so why not buy one of America’s brightest hopes? I’d think there are Japanese, Korean and Chinese companies just waiting
for a chance like this, providing they can afford the tag. Agilent would be foolish
not to get the most money they can for their share of Lumileds. I’d think the easiest course is for Agilent to simply sell their interest in Lumileds to Philips. People inside our
business have long speculated that Lumileds would go to Philips if there was
a divorce, or if one of the spouses died. And everyone knows the Netherlands
(which is Philips’ home base) owns most of the world, but simply doesn’t
brag about the fact. The Netherlands has been a well-oiled and well-heeled country
for a long, long time and is very good at understating their ownership of enterprises.
They’ve been at this ownership/control thing even longer than England. Never
underestimate the power of a strong European company if they have their hearts
and minds set on owning something.

My personal choice, of course, would be to see Lumileds spun off into independent status. Ideally, it would go public on the American
Nasdaq stock exchange. Boy, that’d be one I’d want to have shares in. An IPO
like that would be our industry’s version of Google when it went public. Opening
at $100/share, Google shares are now selling for around $300/share. Google proved it actually isn’t
as bad an economic climate to go for an IPO as many people may think. Lumiled’s LED manufacturing prowess is legendary and its people are among the
best. If it did go public, it could be a very successful IPO. I sincerely hope
Philips and Agilent think about that when negotiations begin… should the rumors prove true.

But like all rumors, this one may not pan out. We’ll see. If true, a sale would
change the LED landscape, depending on who ends up owning Agilent’s LED business
and Lumileds, and whether or not the Lumileds JV is part of the deal. Personally,
I think there’d be tremendous strength in packaging Agilent’s LED business and
Lumileds Lighting together as a stand-alone company, and blowing the doors off
the Nasdaq in an IPO. Whether or not the rumors prove true, I think I’ll start
comparing notes with all the old timers from HP, like Roland Haitz who retired
as R&D Manager for the Agilent components group, and goes way back to the
early days of HP LEDs. And I’ll start digging into my archives (which are bursting
with legend and fact from the old days, along with lots of dust) and enlist the
aid of Strategies Unlimited. Together, Bob Steele and I know all the great stories.
Hey… maybe the price tag for SPG and 50% of Lumileds will go up when potential
buyers, brokers and sellers calling the shots learn what’s really at stake?

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