Case Study: A CEO’s Journey And Learning In M&A

Executives at this year’s SEMI International Technology Partners Conference (ITPC) assessed a number of forces currently shaping the semiconductor industry, including such topics as Internet of Things (IoT) investment, mounting technology complexity, the ascent of China, and pervasive industry consolidation. Participants particularly valued ITPC as a thought-leadership platform for sharing strategic insight with fellow industry leaders.

Entegris President and CEO Bertrand Loy recounted his personal experiences with corporate mergers and acquisitions. He described the benefits and the lessons learned from several transformative M&A transactions.

Loy started his career in the pharmaceutical industry with Novartis and later moved to Millipore, a global filtration and separations technology business. In 2000, Loy was asked to take on the role of CFO of a Millipore spin-off called Mykrolis, which he helped take public in 2001. A few years later, Mykrolis merged with Entegris, where Loy held a number of roles which included COO. In 2012, the company chairman approached him to become the CEO.

As the new CEO, one of Loy’s top considerations was what to do with the ample cash on the balance sheet, particularly in light of mounting investor pressure for dividends and stock buy-backs.

While numerous investment bankers were quick to offer acquisition ideas as a means for deploying the company’s capital, Loy says that he took time to fully assess the motivations, opportunities and risks of M&A.

At the time, Entegris could maintain technology leadership by spending about 6% of revenues on R&D. Loy determined that it would take 10% or more to remain competitive in the future. He concluded that it was beneficial to build scale to enable higher returns while improving performance and global responsiveness — all issues that equate to the creation of customer value.

However, in evaluating Entegris’ history of M&A, Loy saw plenty of reason for hesitation. In the prior 10 years, the company had spent $1 billion in M&A, which had not created significant value as measured by enterprise value, earnings or stock price.

Loy provided a frank assessment of Entegris’ M&A and described how the lessons learned shaped his successful planning for the transaction with ATMI. He concluded that the company’s several small deals were generally unproductive. Loy also noted that Entegris’ larger transactions that were also less than optimal. The $645 million Mykrolis merger in 2005 had the right strategic rationale, but the transaction financing left little room for accretion. According to Loy, the Mykrolis merger also suffered from an inefficient integration, which attempted to preserve the best of both merged companies. Loy said he was probably best positioned to draw that conclusion, since he was in charge of the integration efforts for this transaction.

In 2007 Entegris completed a $165 million acquisition of Poco Graphite in order to further diversify. In retrospect, they overpaid, according to Loy. Neither the customer markets nor technology were adequately understood. Furthermore, the debt financing covenants proved precarious, especially during the macroeconomic conditions that prevailed in 2008 and 2009.

By 2013, Loy knew what pitfalls he wanted to avoid and what type of company he wanted to buy. ATMI had fit that profile well. It was a high cash flow company that was a technology leader serving common customers with complementary technologies. When the ATMI board began an auction process to sell it business, Loy acted quickly.

For the ATMI deal, Entegris did a better job of due diligence, finance structuring and customer focus. But Loy was most proud of the way the integration process was executed.
He strongly promoted speed over perfection. He knew that he wanted to plan really early, define the end state and commit to a timeline. To do this, he created an internal integration office. He didn’t want to go the conventional route of bringing in consultants, and strategists. Rather, he picked three of his best people and made integration 100% of their job responsibility.

His objective: To have 90% of the functional integration plans done by the time of closing. Within a week of closing he wanted all employees to know their job status and to provide those who would not have a long-term role with specific facts of their transition plan, severance package and benefits. Loy says that integration can be a very emotional period. Once uncertainty is eliminated, people can start working on everything else that is necessary to move forward and do so with less disruption to customer service and the business.

Then Entegris spent three full days with a group that combined legacy Entegris business leaders with members from ATMI who were joining the team to hammer out the culture of the “New” Entegris. The discussion on company culture included how things would get done, and what specific behaviors that would be desired and what behaviors that would not be tolerated.

Loy said that the job of the leader is to compress the time of emotional uncertainty by delineating clarity of purpose, rallying organizational energy and providing inspiration so that people will want to contribute to the collective project.

“Communication is the number one priority.” Thought initially skeptical of that mantra, Loy came to believe that communication was critical. He offered the following advice: “You spend a bundle on lawyers, bankers, auditors, tax advisors. Do yourself a favor — hire communication advisors. They will have precious advice especially as you manage the gap between announcement and closing of the transaction.”

To keep the organization focused on the customer, Loy encouraged more frequent meetings with, and among, the company’s business leaders with more short-term goals.

Loy said that having greater scale has proved to have many benefits. Customers have responded well to the new company, which has enabled Entegris to engage in join development discussions with customers in much deeper and higher levels than ever before. It also provides advantages with respect to recruiting talent, especially in Taiwan and Korea where your brand may not be as recognizable locally. 

Epilogue: An Acquired Taste
In the end, speed of execution was rewarded. Loy is gratified that the Entegris/ATMI merger created value for investors, recognition by customers and satisfaction of employees. The share price outperformed peers as well as the general market.
Asked (jokingly) what his next deal would be. Bertrand Loy responded that, as a Frenchman, he likes good food and fine wine, but likes to digest and exercise between meals. The author took that as a prosaic but evasive response. Presumably a consummate consolidator also needs to be a little bit shrewd.

Entegris will celebrate its 50th anniversary next year.

For Part 1 of this article, see “The Urge to Merge.“

Upcoming SEMI executive conferences are Industry Strategy Symposium U.S. (January 10-13) in Half Moon Bay, Calif. and Industry Strategy Symposium Europe (March 6-8) in Nice, France. Other upcoming SEMI events include: SEMICON Japan 2015 (Dec 16-18), European 3D Summit (January 18-20), and SEMICON Korea (January 27-29).