It’s a sorry state of affairs for the startup — which, Reddy assures, has stunning technology — but his comments on the situation are filled with a certain sense of excitement, well beyond the individual case of this startup and its fate. Alliance has come to a defining period in its more than decade-long history. The company, which has always kept an extremely low profile, has a track record filled with instances of boom and bust, and right now, as is the case for many technology firms, the pendulum has swung heavily toward the bust side of the equation.
Reddy admits that his revenues fell from $210 million last year to less than $60 million this year, as the communications bubble that was driving demand for his basic semiconductors suddenly “fell apart,” in Reddy’s own words. He has $100 million in inventory to deplete and the result is an earnings meltdown.
It’s not the first time this has happened to the company. It went public in 1993, and by 1995 was one of the largest cache memory suppliers in the world for the Pentium PC market.
“The market was so great for us,” Reddy recalls. “We exploded and had $200 million plus in sales, $70 million in profits after tax, and made a million dollars per employee net profit.” IBM, Intel and others were forecasting robust growth, but the PC bubble burst in 1996.
“We lost our shirts,” says Reddy simply. He’s candid, but the reason that he’s decided to give a rare interview is to start communicating where he wants to take his company from here.
Paying the Price
Today, after another heavy fall, Alliance (Nasdaq: ALSC) is still trading around $10 per share, for a market cap of roughly $0.5 billion. One of the reasons the company hasn’t been more battered by Wall Street is that it has fairly sizeable assets, mostly in the form of marketable securities.
Six years ago, the company invested more than $200 million in three semiconductor manufacturing plants (fabs): UMC in Taiwan, Chartered Semiconductor in Singapore and Tower Semiconductor in Israel.
In 2000, that investment was worth almost $1.5 billion. Alliance is actually one of UMC’s largest shareholders. Its shares in the company, which is the second largest fab in the world, are now worth close to $400 million, down from a staggering high of $1.2 billion.
It was a fortunate investment, now worth about $500 million, and is a major financial foundation for the company at a time when its core business is in a tough spot.
Reddy laments that the book value of the company is fairly comparable to its market cap, when one would assume the market cap to be two or three times higher. That, he admits, is the price that Alliance will have to pay for chasing boom and bust markets over the past several years, never being able to demonstrate the consistent revenue growth and stability that Wall Street demands.
But the times they are a changin’.
Rebuilding
Another thing that the fab investments have done for Alliance is give the company guaranteed wafer capacity for manufacturing, to the tune of 19,000 wafers per month. In this kind of market slump, that doesn’t mean much, because fabs are running below capacity. But as soon as an up-cycle hits, getting access to wafers is a major bonus.
This is one of the other building blocks on which Reddy hopes to re-engineer his company. He has opened a major design center in India that is finally up and running. It’s time to start over.
“This time we are going to seriously think about where this company should go,” says Reddy. “We are going to get out of unprofitable commodity products.” In many ways this means starting over from scratch. The company has completely gotten out of some markets, like the flash memory market, where it used to compete unsuccessfully with AMD. Internally, Reddy explains, he will look to develop his low-density DRAM business, as well as his SRAM business during these down times so that Alliance has cutting edge products to bring to market.
Reddy especially wants to grow and diversify his business through cash acquisitions in these tough times, given that Alliance has some cash resources to utilize. The company recently acquired PulseCore, a mixed signal IC firm that he hopes will form the foundation team for a new product line.
One problem for Reddy in the last few years is that as the industry boomed and startups flourished, Alliance lost a lot of its key employees.
“We had three spin-offs from this company.” Reddy recalls. “When you have spin-offs the senior management leave and pull people with them. We had 30 to 40 percent turnover and it becomes very difficult to develop new products.” As Alliance employees went on to build some highly-successful companies, Reddy lost his entire team.
Venture Action
But the market realities that cripple a company can also help in other areas. As the communications market started to take off in 1998, Reddy wanted to build a network coprocessor product line to match the new opportunity.
He tried to hire people he knew to build it within Alliance, but they wanted to start their own company, so he funded them. In 1999 the company that they formed — called Maverick Networks — was acquired by Broadcom. As Broadcom’s stock quadrupled, so did the value of Alliance’s investment. The company cashed out at about $100 million and formed a venture fund within the company with the money.
Since then the company has funded roughly 30 companies. Its investments have done well. In 2000 Orologic was acquired by Vitesse and PMC Sierra acquired Malleable Technologies. In 2001 Platys Communications was acquired by Adaptec, and Magma Design Automation recently went public.
As part of his strategy to turn the company around and diversify into new markets, Reddy is hoping to merge some of the portfolio companies back into Alliance.
Alliance 2.0
Currently it’s not a state of affairs that inspires a great deal of confidence. Most people wouldn’t bet their retirement on it, and that’s a concern for Reddy, who has been on the road more often recently, speaking at investor conferences and selling his company’s future.
For the first time since he started the company in 1985 with his brother C.N. Reddy, who now heads up the investment side of the company, Dan Reddy has hired a firm to do some public relations and investor relations work.
The idea is to say: “We’re not a leader today, but in six months we will be,” Reddy explains.
Eventually Reddy hopes to build Alliance into the kind of sustainable, highly profitable, company exemplified by semiconductor powerhouses like Microchip or Cypress that can weather cycles in demand, because they have a large revenue base to draw from. The 62-year-old Silicon Valley veteran admits it won’t happen overnight. For now he’s getting his corporate house in order, making sure operations are up to speed.
One comforting thing is that he’s not the only one struggling right now. Some people who left Alliance during the boom are running up against hard times and want to come back and work for Reddy. He laughs as he talks about it and explains, “I say, ‘Hey, I have my own problems.’”
