The Age Of Alliances

The new semiconductor companies are getting their funding from a powerful combination of hungry venture capitalists, aggressive bankers, and -- suprisingly enough -- some of the country's biggest corporations, which need the custom-designed chips, but which know they can't buy the entrepreneurial spirit that creates them.

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America's new wave of semiconductor start-ups is receiving a giant boost from some of the nation's largest and most powerful corporate entities. Instead of ignoring, or acquiring, the promising young companies, some major corporations are finding new and-profitable ways to work with the entrepreneurial spirit.

Much like IBM Corp.'s recent buy-ins at Intel Corp. and Rolm Corp., these new liasons involve the exchange of corporate financial muscle for cutting-edge technology from tightly focused new companies. Industry observers see in such arrangements the harbingers of a new age of alliances that will ultimately replace the engulf-and-devour mentality too long dominant in corporate boardrooms.

"If you want a new technology, it doesn't make any sense to go out and buy a start-up," observes Jim Keyes, vice-president and chief financial officer at Milwaukee-based Johnson Controls Inc., a $1.3-billion manufacturer of building controls and energy products. "All that you accomplish is to make the founders rich and to lose their people. And it is the people and the skills that you needed in the first place."

Johnson Controls invested $1 million in LSI Logic Corp.'s second round of venture capital financing. At the same time, Johnson Controls also took warrants for an additional 300,000 shares at $7 a share. So when Johnson Controls needed a customized chip for its new and highly sophisticated JC85 building automation system, it approached Wilf Corrigan's fledgling company. Now, with LSI Logic's stock hovering around S20 a share, Johnson Controls has its technological boost and also a nifty capital-gains bonus.

For its part, LSI Logic received not only needed cash and a long-term corporate customer, but also Johnson Control's guarantee of a crucial $6.5-million equipment lease-line from Bank of America. Without Johnson's guarantee, according to bank and company sources, LSI Logic would have been required to put up as much as 30% to 40% of the lease line -- some $3 million to $4 million -- in certificates of deposit as security for the bank.

"This arrangement freed our capital to do other things at a critical juncture," explains Corrigan. "It was one of the very positive factors that got us where we are today. It was the best of deals -- it worked out for everyone."

But even in cases in which the start-up is not as hugely successful as LSI Logic, giant corporations are reaping key strategic advantages through alliances with entrepreneurial companies. When Rockwell International Corp., an $8-billion aerospace company, needed to develop a new line of sophisticated memories, it gained an important competitive edge by teaming up with Seeq Technology Corp., a three-year-old San Jose, Calif., company specializing in EPROM (erasable programmable read only memory) and EEROM (electrically erasable read only memory) devices.

"The key advantage for us was time," claims Coleman Colla, director for business development at Newport Beach, Calif.-based Rockwell Semiconductor Products Division, where memories using Seeq's proprietary processes are already in production. "We could have developed it ourselves, but it would have taken us several years. The Seeq deal enabled us to become technology leaders and get out in the marketplace with product much faster."

For Seeq Technology, the arrangement with Rockwell provided two things crucial for any semiconductor start-up -- cash and leases for expensive equipment. In exchange for access to its proprietary technology, Seeq received a commitment of $5.5 million in staggered cash payments as well as potential royalties adding up to an additional $4 million. Equally important, Seeq has also been able to lease, directly from the aerospace giant, $5 million of sophisticated semiconductor equipment at favorable terms, a deal that, according to one well-placed source, would have been "difficult at best" to achieve on the open-lease market.

Although other U.S. corporations are following the lead of such giants as Johnson Controls and Rockwell International, the most committed practitioner of the alliance strategy in semiconductors may well be Italy-based Ing. C. Olivetti & Co. Sp.A. Under the leadership of its dynamic chairman, Carlo de Benedetti, Olivetti has scoured California for start-ups as part of its strategy to maintain its technological edge against all international competition.

Early in 1982 for instance, Olivetti invested some $2 million in Linear Technology Corp. a semiconductor start-up founded only a few months earlier by the former top management of National Semiconductor Corp.'s Linear Circuit Division. Linear circuits, a $2-billion market in 1980 expected to grow to some $10-billion worldwide by the early 1990s, are used in such systems as computerized industrial process-control machinery and scientific instrumentation equipment. Although linear circuits make up only 8% to 10% of circuits used in most computers, they constitute a much higher portion of all the integrated circuits used in such products as electronic typewriters, long a mainstay of the Olivetti product line.

"Theirs is not a traditional venture capitalist investment," notes Linear Technology's president, Robert H. Swanson, sitting in his Milpitas, Calif., office across the street from LSI Logic. "It's a strategic position. Olivetti sees itself needing technology and de Benedetti is more than aware that there are a lot of linear circuits in his typewriters. It's simply good synergy."

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