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IPO VIEW-Memory chip testers readying U.S. IPOs

Fri Mar 10, 2006 1:26 PM ET

By Scott Malone

NEW YORK, March 10 (Reuters) - Makers of the equipment that tests memory chips are testing U.S. initial public offering waters this month.

Shares of Eagle Test Systems Inc. (EGLT.O: Quote, Profile, Research) debuted on Thursday after the company's $100.8 million stock offering and Nextest Systems Corp. plans to follow up next week with an IPO that would be worth $81 million at the midpoint of its price forecast. Verigy Ltd., a Singapore-based wholly owned subsidiary of Agilent Technologies Inc. (A.N: Quote, Profile, Research) in a regulatory filing disclosed plans for an IPO worth up to $115 million.

The companies make equipment to test the memory chips that are used in MP3 players, cell phones, digital cameras and other electronic devices.

Israeli chip designer Saifun Semiconductors Ltd. (SFUN.O: Quote, Profile, Research), which made its IPO in November, on Wednesday filed plans for a $150 million secondary stock offering.

"Semiconductors have sort of come on in terms of the number of filings," said Ben Holmes, publisher of Morningnotes.com, an independent research company based in Boulder, Colorado. "Now we have to watch these things price in order to gauge if there's any life in this group."

Investor reaction to the debut of this wave, Eagle Test, was mild. The shares closed unchanged in their first day of Nasdaq trading on Thursday and were trading at $15.25 on Friday, 25 cents below their $15.50 IPO price.

The Dow Jones semiconductor index <.DJUSSC> has slid almost 11 percent from its most recent peak set on Jan 12, though it remains up 7 percent over the past year. The semiconductor index was at 1,262.27, up almost 1 percent, on Friday.

Benjamin Howe, managing partner of boutique Boston investment bank America's Growth Capital, said despite the sector's swings, the test-equipment makers appeal to IPO investors since they tend to have longer operating histories than some other entries to the IPO pool, such as development-stage biotech companies.

"It's one of the most cyclical spaces there is out there, even for technology," Howe said. "Yet at the same time ... many of the companies in the semiconductor capital equipment space are larger, with more substance to them, which is consistent with the requirements of the current IPO market."

Eagle Test's filings with the U.S. Securities and Exchange Commission showed net income for its last five fiscal years. In the year ended Sept 30, the company earned $7.4 million on sales of $63.5 million. Results for the last fiscal year were off sharply from 2004 levels, when sales had almost doubled from the prior year, with a similarly dramatic pop in income.

Nextest's results have been spottier, though, with the company recording net losses for three of the five past fiscal years. For the six-month period ended Dec 31, it posted net income of $3.3 million, up 91.4 percent on growing sales.

TRANSDIGM READY FOR TAKEOFF

Another IPO seen as a possible strong performer next week of TransDigm Group Inc., which sells parts for planes manufactured by Boeing (BA.N: Quote, Profile, Research) and Airbus.

"They get two-thirds of their revenue from the aftermarket, which is a recurring revenue stream," said Francis Gaskins, president of IPO Desktop, an independent research firm based in Marina del Rey, California. "They have visible recurring revenue over the 30-year life of these aircraft."

TransDigm, which has been majority owned by private equity company Warburg Pincus LLC since 2003, plans to offer 11 million shares what could be a $231 million IPO.

"It's a good example of a leveraged buyout that actually works," Gaskins said.