"Air Products sale of its high-purity process chemicals business is a telltale sign of a megatrend that has been occurring in our industry. Wet chemicals profits have been limited by a company's ability to control costs in light of the ever-increasing raw materials and shipping costs. Air Products' divestiture of its HPPC business was done most likely to cleave itself of a business that has limited growth potential and shrinking margins. Given the escalating gasoline prices, transportation costs can often be larger than the cost of the product itself, depending on the distance the product has to travel. This tends to limit a US company's ability to compete overseas, where the major portion of semiconductor growth lies.

"However, for a smaller company like KMG, an acquisition of an Air Products business unit can help to boost its sales above $100 million, helping to increase its overall portfolio. In addition, given its preexisting chemical products, KMG may be able to leverage its raw materials purchases to improve its overall margin position.

"I think a lot of chemical companies try to expand into new areas, and technology seems to be an area where everyone has wanted to head for, because of the stories we all created in the mid-80s of high margins and fistfuls of dollars from growth rates in excess of 25% year to year. Now that many of the semiconductor process materials companies are recognizing that the good times are over, they are divesting themselves of those slow/no-growth businesses. And who is there left to sell to? Those companies that have been watching and waiting for the moment to jump into the semiconductor business.

"We have received numerous calls from various companies looking/considering supplying to, or investing in, semiconductor materials. They are all too eager. They may find they have paid for a piece of the action too late in the game.

"We at Techcet have a saying: 'The semiconductor materials business is like pushing a wheelbarrow of frogs to market. It seems like there's always somebody jumping in while others are jumping out... and for no apparent reason.' Ashland jumped in and out of the business, selling to Air Products, who jumped in, and then jumped out, and now there is KMG."

"From Air Products side this is entirely consistent with its strategy that it has been implementing for the last 12 months. The company has identified businesses that do not fit its desired strategic profiles and is packaging these businesses in reasonable, attractive offerings that it has diligently offered to industry participants for several months now, businesses such as the OptiYield developer that was purchased by FujiFilm Electronic Materials last year. Air Products will emerge a different, more focused, and probably better business after this process, but the IC industry will miss a company that is versatile, innovative, and broadly developing novel products in niche segments.

"From the KMG side this is a big acquisition to digest, and although it has picked up a business lock, stock, and barrel---including assets, and ERP support---the hard work lies ahead. The good news is that many customers will not want to requalify the products, although they may step up their audit activity, and the distribution channel is likely to remain under the current chemical management contracts. This means that any supply discontinuities are likely to be minimized.

"On the other hand, KMG has taken on a significant integration challenge, and may struggle to cope with a business of a similar size to its current revenue. To mitigate this risk, KMG is bringing in experienced management from Air Products, mostly comprised of former Ashland personnel, in both the US and Europe, who can smooth the transition. Business integrations seldom go as planned, and Air Products' timetable to hand off its commitments will introduce plenty of pressure in the integration efforts.

"Lastly, KMG has both a challenge and an opportunity in moving forward. A key application for high-purity chemicals is in cleaning and etching advanced devices. As 45 nm enters pilot production, the challenge is in cleaning structures without material loss; in the absence of high-energy agitation to avoid damage, novel chemistries are key to enabling the improved cleaning process needed for 32 nm. With the advent of high-k dielectrics and metal gates, new materials will soon enter the process environment.

"A small supplier may struggle to commit the R&D effort to meeting these needs, but a well-focused effort from a company wishing to grow its new business may pay dividends in achieving KMG's growth objectives. In addition, if KMG can leverage its position in emerging markets such as crystalline silicon photovoltaics, then it may have the opportunity for significant incremental growth."