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Acquisition success: interview with Philip Rasmussen, Finance Director of IQE

27 March 2009

Late last year, sales at AIM listed electronics group IQE plc took a tumble – something that came as a bitter blow for the company which until then had worked hard to protect itself from market volatility.

At the time, finance director Philip Rasmussen predicted that the slump was simply an industry adjustment and that things would pick up during 2009. According to the company’s latest figures, his forecasts have turned out to be correct – and a surge in its share price suggested that investors were in agreement.

Since joining IQE in March 2007, Rasmussen, together with chief executive Drew Nelson, has been meticulous in building a business capable of withstanding the vagaries of an industry evolving at a blistering pace.

Rasmussen’s influence on strategy at IQE dates back to 2006 when he was director of transaction services at business advisory firm PricewaterhouseCoopers in Bristol. At the time, he was advising the company on two major acquisitions – EMD in the US and MBE Technologies in Singapore.

EMD was an epi-wafer foundry business snapped up for US$16m in a move to transform IQE into the leading global outsource supplier of epi-wafers to the wireless market. The deal also aimed to speed up sales and broaden the company’s customer base.

MBE Technologies, six months later, was a Singapore based maker of compound epi-wafers which cost IQE S$23m (£7.5m). That deal completed the company’s strategy to become the largest supplier of epi-wafers into chip manufacturers and provided a welcome boost to its product range. In addition, it gave the company greater buying power among suppliers and injected another set of new customers and geographical markets.

“I have seen so many transactions fail because the strategy behind them has not been rigorous,” he explains. “The two acquisitions that we made in the US and Singapore in 2007 have been very successful, and the reason reflects the strategy - there was a whole host of things that those acquisitions completed in terms of the IQE strategy.”

In the first instance, the additional businesses opened the door to more customers – a key factor given that IQE was at the time looking to win supply deals with all of the wireless chip companies around the world.

“Those businesses gave us a unique competitive advantage in that we became the only epi-wafer company to use the two manufacturing platforms that are available in the industry – MOCVD and MBE,” he says. “They also gave us dual sites in both of those platforms, and that is absolutely unique among epi-wafer companies.”

In addition, Rasmussen points out that the acquisitions helped to elevate the company into a market leading position, giving it critical mass and economies of scale.

“We have since been very successful at getting the absolute best pricing on raw materials and we have brought those prices down continuously year after year,” he says.

“A lot of companies do acquisitions on the basis of “synergies”, but those synergies are often never realised,” he continues. “There are lots of empirical studies around which demonstrate that.

“Cultural problems is the other issue. We managed those issues because our deals were not driven on synergies, they were driven on strategic benefits and in terms of culture we manage our businesses on an autonomous basis. So we get the advantages of all being part of a group but each site has a general manager. The businesses work together in terms of servicing the same customers but on a day-to-day basis they are independently managed. I am absolutely convinced that that is why these acquisitions have been really successful.”

Market drivers

IQE has grown fast in recent years as demand for its Gallium Arsenide-based semiconductor wafers has taken off. Those wafers are bought up by chip makers around the world who use them to power wireless devices including anything from mobile phones and laptops to televisions.

Last year’s fourth quarter dip in sales didn’t stop the company posting an annual 21% rise to £60.5 million, with EBITDA more than doubling to £8.4 million and underlying operating profit up sevenfold to £4.0 million.

Rasmussen says last year’s last minute slip was caused by IQE’s customers running down their inventories rather than buying new stock, but on a brighter note that dip is starting to show signs of a return to normality.

Indeed, Rasmussen reckons that while the mobile handset market alone has enjoyed a prolonged period of 10% growth, IQE’s niche market for high-speed technology is actually growing even faster.

“This is a trend that has driven across the industry, throughout our customer base,” he says. “There are about a dozen wireless chip companies around the world who are our customers and they account for 90+% of the wireless chip market. A key part of our strategy has been to supply all of the wireless chip companies – and that is what we have been successful at over the past few years, increasing that coverage.”

As recently as mid-March IQE qualified with the last of those companies, meaning that it now supplies all the key players. It’s a situation which Rasmussen believes offers a fair degree of resilience to IQE, making it less susceptible to the performances of its customers. “That has been a really powerful driver,” he said.

Indeed, in September last year, the strategy proved its value when IQE’s then largest customer, Nasdaq-listed Anadigix, “hit a brick wall”. Anadigix had accounted for around 20% of IQE’s revenue, having experienced very strong growth on the back of some advanced wireless products.

“They were a victim of their own success because they couldn’t keep up with customer demand for their products,” Rasmussen explains. “Their own volumes fell significantly because their customers looked elsewhere but we weathered that storm well because their volumes simply went to our other customers.

“That’s a fundamental part of our strategy which ties us into the underlying dynamics of continued growth in wireless and continued growth in the speed of communication.”

While the market fundamentals are hard to dispute, the IQE management team has still needed to respond to the wider economic slowdown and strike a balance between investing in infrastructure while also cutting costs. Last year that meant transferring to a larger facility in Singapore and bringing a previously moth-balled site back into use.

“In November and December, when volumes took a hit, we were very proactive in managing costs and we did a number of restructuring activities – streamlining processes, reducing headcount, voluntary pay-cuts and short-time working,” Rasmussen says. “That helped to protect profits in 2008 but it has also put us in a strong position for 2009.

“We’re at a bit of a low point in the cycle now, in Q1, as the inventory reduction in being worked through, but we remain EBITDA positive and we are seeing continual signs of improvement for Q2 and Q3.”

Ben Hobson, SmallCapNews.co.uk