Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM), once on the verge of bankruptcy, has a current market cap of NIS 5.2 billion - the same as First International Bank of Israel (TASE: FTIN) and Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL), Israel's largest insurance company. No, this is not an overinflated bubble about to burst. Russell Ellwanger, the company's American CEO, has led a long process of recovery and building with many stumbling blocks since 2005.
Ellwanger, who will celebrate a decade in his post on May 1, does not conceal his excitement when he hears that Tower Semiconductor's share is getting closer to inclusion in the Tel Aviv 25 index. For him, the inclusion of an industrial-technological company like Tower Semiconductor in the index of Israel's 25 largest Tel Aviv Stock Exchange (TASE) companies is both a personal achievement and a milestone for the local industry. "Being on the Tel Aviv 25 will be very exciting for us. I can't say whether or not it will happen, but if it does, it will be fantastic, amazing," he says in a special "Globes" interview marking his 10th anniversary as company CEO.
Tower Semiconductor, which manufacturers chips at its fabs in Migdal HaEmek, in California, and in Japan, is the hottest story on the TASE over the past 15 months. The company's market cap was still at NIS 650 million as recently as December 2013, following a 75% plunge in its value within 18 months, but in the last two weeks of 2013, the share skyrocketed 50%, after Ellwanger revealed an unexpected deal with Japanese electronic products company Panasonic.
So far this year, Tower Semiconductor's share has added 250% to its value, a jump that, last week, led most of the company's holders of Series F bonds convertible bonds to consent to early conversion of their bonds on preferred terms. This development will push Tower Semiconductor's market cap up to NIS 5.2 billion, putting it in 28th place on the TASE in market cap. This massive conversion of debt to equity is also expected to enable Tower Semiconductor to report cash balances in excess of its debt in its financial statements for the first quarter of 2015 - something that had seemed almost inconceivable.
Ten years is a long and exhausting period, certainly for a manager of a company in difficulties with thousands of employees in Israel and elsewhere. Ellwanger, however, has no plans to resign in the near future. He says that his mission is far from over, and that he needs at least another five years in his job. "My initial commitment to Idan Ofer (the controlling shareholder in Tower Semiconductor) was for ten years, and I have fulfilled my commitment to him. I have now undertaken to stay another five years, because the company is in a completely different situation from where it was when I first arrived."
For Ellwanger, Ofer is the main reason that Tower Semiconductor still exists, and its Migdal HaEmek fab is still producing silicon wafers and providing a living to more than 1,000 Israeli workers. "I can't exaggerate the importance of Ofer's contribution to the company's continued existence. He remained committed to us when other investors left over the years."
"Globes": What did you find when you got here?
Ellwanger: "The company was in a bad financial state, burning cash, and reported a negative cash flow from regular activities, with a bank debt of over $500 million on its back. But I had a vision of turning Tower Semiconductor from a second- or third-rate manufacturing subcontractor arguing over pricing in order to get deals into a value-generating specialty company. In order to do this successfully, the first thing I had to do was to surround myself with people who would be able to realize this vision."
You had a plan for getting Tower Semiconductor out of the mire. Looking back, did the plan work?
"When I was interviewed by the Tower Semiconductor board of directors, I gave my word that we'd turn a cash burning company into a cash generating company, a growing company, and that we'd reach annual revenue of $1 billion within ten years. We reached an annualized revenue rate of $940 million in the fourth quarter of 2014, and we're set to reach $1 billion in 2015.
"Could I have predicted in 2005 that we'd reach a status in the industry that enables us to found the TowerJazz Panasonic Semiconductor (TPSCo) joint production venture with Panasonic? Certainly not. But was it clear that we had to increase Tower Semiconductor's production capacity? It certainly was. With a revenue rate of $100 million a year and negative operating cash flow, we never could have reached a position to found a joint venture like this. Who would have dared to do it with us in such a situation?
"So I feel we've made great progress, but we have a lot more to do. We haven't finished our tasks; we're even far from doing so."
A big deal in Japan
Tower Semiconductor's main fab in Migdal HaEmek - Fab2 - was founded at the beginning of the previous decade at a cost of $1.1 billion, with excessively high 50% leverage. This situation put the company into severe financial straits, causing it to delay for years the purchase of all the equipment needed for working at full capacity.
One of the first tasks facing Ellwanger as CEO was reducing the company's debt burden, which threatened its existence at the time. Together with CFO Oren Shirazi, he reached agreement with the creditor banks, Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI), for conversion of 30% of the debt to them ($158 million) into capital notes convertible into shares. A few years later, they went a step further with the banks, including the conversion of another $200 million into capital notes (and postponement of repayment of the remaining debt) in return for agreement by Israel Corporation (TASE: ILCO) to inject $100 million into Tower Semiconductor and accept capital notes convertible into equity for it. At the end of 2014, the company owed Bank Hapoalim and Bank Leumi $100 million, which it is scheduled to repay by the end of 2018. According to Ellwanger, not only did the banks not lose money on their original loan, but they will eventually receive a positive return on their Tower Semiconductor adventure.
Ellwanger's plan, however, also included a massive increase in production capacity, both at the original fab and beyond it. For this purpose, in a 2008 share swap, Tower Semiconductor acquired Jazz, a company with a fab in California, and made another deal in 2011 to acquire a fab in Nishiwaki in Japan from US company Micron for $140 million.
The masterstroke, however, was the deal with Panasonic, in which Tower Semiconductor took advantage of the electronics giant's wish to get rid of its three inefficient fabs in Japan. Panasonic agreed to give Tower Semiconductor 51% ownership of the chips production facilities, and undertook to continue procuring its chips from the fabs for five years in exchange for an allocation of Tower Semiconductor shares worth a mere $8 million.
Tower and Panasonic set up a joint venture, controlled by Tower, to which the fabs were transferred. In this way, the two companies circumvented the traditional Japanese corporate culture that makes it hard for local companies to streamline through laying off workers. It was Tower that carried out the efficiency measures, and Panasonic gained from its holding in the fabs, that returned to profitability.
The deal made Tower the controlling shareholder in fabs that will expand its production capacity by 800,000 silicon wafers a year, and its revenue by $400 million a year.
Asked about this move, Ellwanger says that the purchase of the Micron fab in Nishiwaki was the springboard to it. "In 2013, when we just started to talk to Panasonic, they already knew us, because we were in Japan with a successful semiconductor fab producing for the analog market (similarly to the Jazz fab in California, O.C., S. H-V), with sales of $500 million a year. For Panasonic it was a good deal, and for us it was amazing. Unfortunately, by then we didn't need the fab in Nishiwaki, so we closed the site and transferred its activity to the Panasonic fabs, to save the fixed costs."
The deal with Panasonic is seen as a game changer for Tower. Are here other steps you took that, in retrospect, could be described that way?
"There were several. The first big step was to carry out within a few months a restructuring of the company, and the second was the acquisition of Jazz, which expanded our sales, put us into analog, and enabled us to exploit synergies and save $100 million annually in duplicated costs. Reaching the $500 million annual sales threshold was also a game changing situation for us, because we could obtain production deals for large customers that don't work with small suppliers."
"Don't prove you're right; win the customer"
Earlier this month, Tower provided an example of such a deal, when it announced that it had started mass production of mass production of an IR sensor used by Intel in one of its new 3D sensing solutions. The deal should generate hundreds of millions of dollars revenue for Tower over the next four years, and gives the company the imprimatur of one of the world's biggest semiconductor makers.
Before the deal was signed, Intel representatives came to inspect the Migdal HaEmek fab. "We gathered the employees together and I told them that, contrary to the rumors, we were not buying Intel. Then Idan Ofer, who was here too, shouted out from the crowd 'Not yet'," Ellwanger relates, and adds, "Ten years ago, there was no notion that we could do such deals."
You talk of at least another five years in the job. Where would you like to see Tower at the end that time?
"In another five years, I'd like to see Tower with an annual net profit in the hundreds of millions of dollars, with more fabs in the US, and with further expansion in Asia. That's not a goal we have defined, but I think that from where we are, it's possible to grow profitably."
You mean you will make more acquisitions of fabs in the US?
"Yes, but in other places too. Today, we have a production capacity that gives potential revenue of $1.2-1.3 billion annually, and we'd like to add to that. There deals that only give production capacity, and there are those that also get us into new technologies, and we'll do both kinds. I also aspire to a situation in which, beyond customers and investors, people in the US will know Tower the way they know Motorola and Texas Instruments."
At the beginning of this year, you left the Israel Corporation umbrella, and became part of the Kenon group, also controlled by Idan Ofer. At the same time, the possibility exists that Kenon will shortly distribute the shares it holds as a dividend in kind, and you will be left without a parent company. Does that matter as far as you are concerned?
"Idan Ofer holds 55% of Kenon, and he's a long-term strategic investor, so he will continue to be our largest shareholder. As far as other investors are concerned, some may perhaps wish to sell, but I don't think that that makes any difference."
Looking back, what would you say leads to success?
"Two things determine personal or professional success: first of all, the vision - who do you want to be?; and secondly - the team around you. That is to say, what you do to develop yourself, and who gives you advice along the way. If you have the right know-how, qualifications, and approach, it's hard to stop you. What others see as failure, you see as a lesson to be learned."
Is there anything you regret?
"I don't deal in regrets. There were mistakes I made and that cost us money, things that in retrospect I would have done differently, but the big picture is that we developed and grew, and everything we did helped to bring us to the point we are at now. If the customers have confidence in you as CEO, they will give you another opportunity even if something fails. In general, there are always challenges and cultural differences, but that's great. Give the customer the feeling that he's smart, and help him feel that way. The goal is not to demonstrate that you're right, but to win the customer. To put him in the center."
And what has been tough for you?
"Sometimes there are tough decisions, such as to dismiss certain people that you like, because they no longer contribute to the company. When I started in this job it was very easy to make changes because I didn't know anyone, but with time you form bonds and then it's harder to fire, even when people no longer fit their jobs. So that's hard, but still very important, both for the company and for them."
Published by Globes [online], Israel business news - www.globes-online.com - on March 29, 2015
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