C. William Zadel, Chairman/CEO, Mykrolis Corp.

C. William Zadel (Source: Mykrolis Corp.)

SI: You stepped down as chairman of Millipore in February 2002, when Mykrolis was finally spun off. Did you encounter any difficulties turning the company into an autonomous organization?

Zadel: In the fall of 2000, the semiconductor business within Millipore was doing well, growing very fast — as was the rest of Millipore, which is basically pharmaceutical and life science products. However, it's very difficult to have a highly cyclical semiconductor business embedded inside a larger company, so we decided to separate.

SI: If you were doing well, why separate?

Zadel: We did it for strategic reasons. We decided we could satisfy both sets of customers better as independent companies, because the industries are so different. When the board agreed with that assessment, we had to do a number of things. First of all, we decided on an IPO of less than 20% of the new company and then to later dividend, tax-free, Mykrolis ownership by Millipore to Millipore shareholders. Before that, we applied to the Internal Revenue Service to get a pre-ruling that we would indeed qualify for this tax-free treatment. It took us from October of 2000 until the summer of 2001 to get the IRS pre-ruling. Meanwhile, we also had to get Securities and Exchange Commission approval, in the form of a registration, that we could form the company under security laws. It took a while to get the necessary form approved, to enable us to sell the securities.

SI: When did the separation happen?

Zadel: In April 2001 we internally separated the companies, so that within Millipore we were functioning as a separate semiconductor business. That meant all the business processes and systems were independent from each other — the semiconductor business was collecting its own bills, running all facets of its own business. All this was necessary before we could do the IPO. Finally, in August 2001, we were in a position to do the IPO and, again, because we were driven by the need to separate the businesses, we were willing to do the IPO even though business conditions weren't ideal and we didn't maximize the value of the shares' sales in the company.

SI: Were there corporate culture problems as a result of the separation?

Zadel: One thing we thought would be improved by the separation of the businesses was that we could bring business practices more in line with the industry. Under Millipore, the business was guided by Millipore culture. It is a very good culture: ethical, high-integrity and innovation-based, with direct access to customers, and devoted to customer satisfaction. However, there were many things within it that weren't in step with semiconductor industry needs.

SI: Such as?

Zadel: The benefit plans, etc., were not really designed for a cyclical business, and it was very hard to have temporary employees. Since we had different Millipore businesses operating in the same manufacturing plants, we had to do things the same way regardless of what industry we were serving. Consequently, the Millipore culture was not conducive to an efficient semiconductor operation. Since separating, we have been able to make changes in our approach to things, and we're creating a culture much better suited to the semiconductor industry.

SI: Describe Mykrolis today.

Zadel: It's a company with a new name, which nevertheless has a business that is 25 years old. We service the front-end equipment makers in the semiconductor industry, and have a very strong franchise with all of the main players that make that equipment. We also have a strong franchise with semiconductor manufacturers themselves, because for years we have been selling them replacement filters and purification products. This gives us a broad product line and enables us to sell to both the front-end equipment makers and the semiconductor manufacturers. Because we have products based on innovation that add value, consequently we're able to retain fairly high margins, and we provide a global sales and service organization to serve our customers.

SI: You mentioned the downturn. Besides the first-quarter loss, how was Mykrolis affected?

Zadel: Our business hit a peak in the fourth quarter of 2000 when we reported quarterly sales of $100M. After reaching a low of $38M in the first quarter of 2002, we reported sales of $48M in the June quarter — a 36% increase sequentially. We're cautiously optimistic that we've bottomed; we're seeing improved prospects for this year and next. But in terms of how the downturn hit us, during 2001 we had to cut back 35% of our people, and did a lot of restructuring of the organization to reduce expenses. We're now consolidating manufacturing facilities — partly to get out of Millipore manufacturing facilities, but also to lower our manufacturing footprint and costs.

SI: Is there anything else you are planning to change?

Zadel: We're making a number of changes. The manufacturing consolidation is one that I believe is significant. We'll be pulling out of Millipore facilities and consolidating in a new headquarters in Billerica, Mass. We've changed our organization to be more functional, streamlining communication and reducing costs. All of this has been underway for about a year and a quarter.

SI: On the business side, what are some of your short- and long-term plans and strategies?

Zadel: Ours is a high-tech industry, so new product development is always an important part of our short- and long-term strategies. Although over the last year we've reduced expenses, we kept our key R&D programs in place and continue the internal development of new products, which we'll launch over the short term. We have long-term programs in place as well. We see real opportunity in the Asian region, in terms of the shift of the growth process and the foundries. We'll increase our investments in countries like Taiwan and China, where we see opportunities for growth, particularly with the semiconductor manufacturers there in the foundries. We also have a broad product portfolio and expect to leverage the breadth of our product line to increase market share across a broad range of products.

SI: You mentioned spending more in Taiwan and China. How significant is your presence in Asia?

Zadel: We've been in the region for quite a while. We have eight wholly owned subsidiaries — Korea, Singapore, Taiwan and Japan, as well as France, Germany, the UK, and the U.S. Our Taiwan business was the only sector in where, over 2001, there was growth instead of decrease, as was the case with the rest. We have a strong presence in China, and yet we're investing even further with the opening of a new service center in Shanghai to support the business there.

SI: That seems to be the path followed by most companies in our industry. Is there anything that your are planning to do differently from your competitors?

Zadel: Our products distinguish us from our competitors. We do have sizable market shares in many of the segments where we compete. Our global reach is at the high end in terms of our organization, to support customers in many places of the world, which many of our competitors lack.

SI: What are your next growth areas and how are you planning for them?

Zadel: We see growth potential in the markets in which we are already players, through market share gains and just industry growth. Over the next four years or so, we're looking at possible acquisitions in areas that aren't in the markets we're in now, but are instead extensions of them. They should provide good growth opportunities for us.

SI: Are these still in the semiconductor industry?

Zadel: Yes. Of course, we do have a business that isn't semiconductor per se, but very closely associated with it — flat-panel manufacturing, optical waveguides, optical disks and solar disks. These use many of the products that the semiconductor manufacturing process uses. We see an opportunity to grow that business as well, not through acquisitions, but through internal development and better market access to those markets.

SI: Downturn aside, does it appear growth is getting more difficult to achieve?

Zadel: Consolidation is taking place at all levels of the industry. This creates more substantial — although fewer — competitors. That being said, I believe that growth in the semiconductor industry will continue to be very strong — albeit cyclical. Companies with the best strategies and executions will continue to grow faster than others.

SI: Any thought on the landslide of consolidations taking place?

Zadel: There are many companies that see the world as we do, plan to grow, and have made significant acquisitions. I don't know how successful the integration of those companies has been. Time will tell. We would consider making strategic acquisitions, but only if they add to our core strengths and if we're confident that we could manage the integration well.

SI: You spoke of innovation. What should your customers expect over the next two years?

Zadel: We typically turn out between 10 to 20 new products a year, some major, others extensions of existing product lines. But our customers look to us as a partner that helps them solve manufacturing or process problems with our technologies. We work with the customer and use our expertise to find a solution for their problems, improving their processes and increasing our business.

SI: So you provide customers with expertise and help them characterize their processes.

Zadel: That's the differentiator with us; we don't just sell products. We have an organization around the world composed of sales people as well as application specialists who help our customers apply our technologies to solve their problems. It's a partnering model that adds much more value.

SI: Do you see any industry trends that we ought to be paying more attention to?

Zadel: Everybody is looking at end demand, and PCs have been the traditional driver of the end demand for microprocessors and memory chips. I believe PCs are going to be overtaken by consumer electronics and communications devices. It's important that end demand keep to a certain level to support the industry's growth. I think there'll be an end market change. Consolidations continue, foundries will go on growing, and manufacturing will continue its move to Asia.

SI: It appears that, whether the downturn has truly ended or not, the industry will be flat for the rest of the year. Is there anything we can do to minimize these cycles?

Zadel: (Laughing) If I could answer that I'd make a lot of money! The industry has an inbred cyclicality because capacity at the semiconductor makers' level must be added in such large chunks. As long as that's an issue, right after capacity is added there's going to be a cyclical downturn because capacity is in place and toolmakers must wait until more tools are needed. Then, when capacity utilization reaches a high level, foundries spend to add capacity and, as a result, there's an upturn. This last downturn was exacerbated by capacity getting too far ahead of need. Buying during 2000 reached a new high, and the tempering of end unit demand caused this severe downturn. I don't believe that there's a way to change the industry's basic cyclicality.

SI: Besides cyclicality, is there anything you would like to change in our industry?

Zadel: No. It's a great battlefield for companies to compete, and a tremendous source of science and technology that affects and improves life across all areas: medical, safety and entertainment.

SI: Anything we should prepare for in the next two years?

Zadel: Everybody's looking for the next killer app, and I am not too sure that anyone knows what that is. The trend toward new uses of semiconductors will continue. Two years from now I believe the industry will be in a very nice upcycle that should start next year. What will decide how high that upturn goes will be end demand — global markets, recession vs. high growth. Who knows, there might even be a killer app or two to come and put us on a strong growth path.

SI: Describe Mykrolis in five years.

Zadel: We have a strong growth path. We have many opportunities for internal growth through new products, and we will add new capabilities through acquisitions. We'll provide greater value to customers. We expect to outgrow the growth of the semiconductor market over the next five years, be more substantial than now, and continue to invest geographically to ensure we're present where our customers are.