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Credence and LTX Merging

Posted on Tuesday, Jun 24th 2008

I have repeatedly expressed my views on the faltering EDA industry and recommended that it needs to innovate and consolidate. I had predicted the necessary tech takeover battle in the semiconductor industry and talked about the industry’s need to find adjacencies. Cadence’s bid to acquire
Mentor was yesterday followed by the announcement of Credence’s merger with LTX in an adjacent space.

The merger of Credence Systems Corporation (CMOS) and LTX Corporation (LTXX) will bring together two manufacturers of automated test equipment for the semiconductor industry. Semiconductor manufacturers are struggling with cost pressures and require fast, innovative and low-cost testing approaches. The ATE industry has been plagued by losses, and pressure from customers to deliver more functionality at lower price-points. Credence in particular, has had a rough ride. LTX, at present, looks healthier, having finished some of its cleanup already.

With the merger, Credence will own 50.02% of the combined entity and LTX 49.98%. Credence’s CEO Lavi Lev will become the executive chairman of the merged entity during the transition, and LTX’s CEO, David Tacelli, will become CEO after the merger.

The merger seems to be a good move for Credence. Last quarter it announced losses of $0.10 per share on revenue of $68.1 million. Two weeks ago, the stock reached a new 52-week low of $1.00 and is currently trading at $1.25 levels.

CMOS 1yr

LTX, on the other hand, announced its first profitable quarter with an EPS of $0.03 on a revenue base of $39.3 million. Its profitability will provide a more stable base for Credence to operate on.

The two companies are predicting several benefits from the merger, including cost efficiencies of $25 million annually.

Credence has the largest installed base in the Asia-Pacific region, with further expansion in
China underway. It plans to outsource 80% of its manufacturing capabilities to
Asia by the end of the year. As Asia is currently the destination of choice for testing and assembly houses, Credence’s geographical advantage will tie up well with LTX’s global network of applications and support resources.

Given that Credence has a bigger piece of the pie in the low-end ASL series and LTX has better footing in the mid-range RF/Mixed Signal segment, the merged entity will be able to cater well to the consumer chip market which is currently driving majority of the growth in the semiconductor industry.

The ASL series of linear and mixed signal IC test systems and the RF test systems are already accepted and deployed in over 180 companies worldwide. LTX’s RF wireless is its key operational segment and won Texas Instruments’ Supplier Excellence Award for its performance. The company’s X series continues to prove itself as the best price/performance solution on the market.

In the high-end, Credence’s product portfolio includes Sapphire, an IC test system that supports advanced functions such as mixed-signal, multi-threaded, multi-site, and multi-Gbps tests.

In its last quarterly results, Credence noted Sapphire’s ability to generate up to 50% in cost savings due to “its capability for massive parallelism.” However, Sapphire’s major customer, AMD, is going through troubled times. The merger with LTX will add Texas Instruments to the high-end customer list, which will mitigate revenue choppiness risks.

Overall, the merger will benefit both LTX and Credence as it looks to be a complementary marriage of product, customer and geographical portfolios.

Consolidation is a necessity for the ATE industry just as much as the EDA industry. In fact, a whole new layer of consolidation that bridges the design side and the test side is in order. The industry is moving towards inserting “testers” into the chip, thereby eliminating / reducing the need for high-end testers in most cases. In that scenario, the high-end tester market is going to see a dramatic deceleration. Low-end testers would not only suffice, it would become absolutely essential for chip vendors operating under margin pressure to bring test costs down by replacing expensive, high-end testers with lower-priced ones.

In the next few years, we will see a much tighter integration between design and test, and potentially more conversations between the EDA and the ATE industry.

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