Science Technology Company - 1985

Science Technology

Science Technology company case

After reviewing the financial forecast from Science Technology Company and Semiconductor industry market situation, I concluded that 30% annual growth is not feasible, optimistic growth forecast is 15% .Because world semiconductor shipment kept growing, but not just semiconductor market but electronic products market was also dominated large market by Japanese manufacturers. If the company carried on with the same profit/cost structure, the company's ROA would be 5% more or less in next 5 years, EPS would be 0.44 - 0.97 and stock price would goes down to less $10 - less $20. I can assume that there is no additional stock issuance. As of 1984, the ROA is 5.6%, EPS 0.57 and stock price $13-$37.

1. Background

Main business

Design and manufacture tester and test software for printed circuit boards with worldwide sales and service network, was headquartered in Minneapolis and had plants in Minnesota, Colorado and Arizona.

Leading manufacturer of ATE (automated test equipment), 31% market share and semiconductor test operation which uses more than $1million systems

2nd large business

Total sales revenue $227 million in 1984

Object

ATE market by $84 billion dollar business

2. Semiconductor Market Situation

High technology, intensive large capital required for production asset, periodic production line update need according to new chip development in quick cycle. During 1975-1984 swiftly and dramatically technologies change, inspired the development of new products.

Requirement to semiconductor for high quality and low price product created demand for critical test required in engineering, production and service. Silicon chip - Short technological obsolete cycle, any change in the design needed a new chip semiconductor price per megabyte declined in early 80's from $100 to almost $10 dollars.

In late 70's to early 80's Japan has national project to develop semiconductor, 6 of 10 world top supplier from Japan after US prosperity. Major semiconductor market was in Japan (more than 50%). Japanese semiconductor supplier dominated Japanese market due to its exclusive market structure and started to increased market shares in US market, but US supplier could not do so.

3. Demands for testers from Semiconductor customer

Higher speed to go into manufacturing a new design products required more testability. To find out detective/reject before mounting on the board, to spot early production stage and ATE increased its presence in production. Sales in total ATE $359 (1978) to $1.6billion (1984) 28% /year growth, expected $4billion in 1988 at 26% compound annual growth rare.

4 .Growth driver

・More semiconductor was built in more electronic products and its shipment kept growing

・Labor rate increase required automate testing operation to reduce labor cost.

・Specialization, work division due to more complexity and high cost to develop semiconductor device tester

・Improvement of testing technology and tested devices change

・After inflation settled, interest rate decreased and corporate income tax would reduce from 46% to 34% in 1986 to stimulate more investment.

・Semiconductor agreement between Japan and USA due to lobbying and US government put pressure to