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 Japanese government to open Japanese market.
・National project SEMATECH started to recover the position in semiconductor market.
・Plaza Agreement in 1985 allowed weak US dollar and advantaged export increase.
5. Business Risk
・Semiconductor price per megabyte reduced dramatically and affected semiconductor supplier profitability.
・Semiconductor agreement set price floor restriction in worldwide market. It resulted in good for Japanese supplier to have better profitability.
・More intense competition, unexpected entry
・Asian counties Korea and Taiwan started national projects to grow their semiconductor industry
6. Recommendation
Based on preceding discussion, I think the company would be able to target 15% annual sales growth as realistic goal. However the company had a problem in its profitability. If compared with industry average and industry high, mainly SG&A cost was outstanding and R&D cost increase would affect its profitability. To low its R&D cost in higher competition market, I would recommend that the company focus its investment on some main segments and improve company performance. If the company improved its SG&A cost to industry high, the company performance would gain up to more than 10% for ROA for and 3.42 for EPS in 1989.( *assumed no additional stock issuance, but the company would need additional capital funding.) Further different from semiconductor suppliers, for testor manufacturers, it was rather easier to go into Japanese market even its unique business structure. It is very important to increase market share in Japanese market; world largest semiconductor supply source. It would be possible to increase market share, if testors has sufficient technical advantage against local suppliers even under Japanese unique business structure. Further for another cost improvement and future growth, the company needed to care about Asian countries which started national project to grow their semiconductor industry to be the first mover.
Competition
Capital spending equipment
Japanese business structure --- group capital funds ----- Cost of capital American vs. Japanese
US bank interest difference
Problem --- compressing, short product cycle, hard to keep up, competition bigger, fast, intense Poor ROA performance Go public 1982
At the time like .com boom a lot of company got public, execution problem
Inventory turnover obsoleting --. Inventory clear with lower cost  less profitability --- Less income -- less capital, less cash
Financial mismanagement, long term assets need long term debt, longer account receivable cycle

Business model - problem itself
Solution--- outsourcing / close factory - rationalization/ research new niche market -----. Strategic alliance=confusion, shift to more software rather than hardware /
Partnership ---- lower risk, cash flow might increase. Example: New sakes channel,
Sell out company, overseeing, down-sizing  high quality performance
Sell company with dividing half--- making higher margin/ multiple go private MBO --- premium 10-15 %, able to focus on own business, save management time 20%, no need disclosure