This morning, your humble editor had a call with Mark Adams, President and CEO of SMART Global Holdings to discuss their acquisition of Cree LED.
Randy: In the investor call you mentioned this was your second due diligence with Cree. Were you considering acquiring their fixture division which was sold to Ideal Industries?
Mark: No not with SMART. As you know I was the former CEO at Lumileds and during my time there we started down the path looking at Cree. My Board of Directors did not have the taste for it and the talks did not go anywhere. I am a boring guy from the Northeast and love U.S. success stories. Cree is a great American company and I have always been intrigued by the Cree story.
Randy: In the call, you mentioned the importance of niche markets for both SMART and Cree, I was surprised to see only 1% of Cree’s business was automotive. Do you plan to grow this niche? Are there other niches you plan to grow?
Mark: Claude Demby will be our president and will run this business, so I don’t want to get ahead of him. But Cree does not have a lot of automotive business, however they have had some recent breakthroughs, so we will see. We will take a look at the entire businesses and rationalize, which is part of any good M&A process. Cree has a history of specialized lighting, such as emergency lighting, stadium, and even horticulture. As a pioneer they have done unique things which is how you can drive better value. We do the same thing at SGH as we do a lot of custom work that the big OEMs don’t want to do. It might be a custom board or custom firmware, and we like this approach because the customer will pay more for the added value.
Randy: Did I hear correct that you and Claude are looking at some businesses which you may not take with you?
Mark: For example, we are not taking the North Carolina fab with us, that stays with Cree, as this is an asset-light deal. Cree will supply us as we move to an outsource model. Probably 75% to 80% comes from North Carolina right now but that is moving to a manufacturing partner in Taiwan, now that we are migrating from silicon carbide to sapphire.
Mark: Yes, and they have merged with Lextar and they will supply our high-power needs. Our JV with San’an will continue for mid-power.
Randy: If you close sometime in Q1, 2021, how long can your team stay on the Cree campus?
Mark: There are 400 employees and they are scattered throughout the Cree campus. Cree had a strategic pivot when they hired Gregg Lowe, who, by the way, is one of the best CEOs in the tech sector. He had to make a decision to stay with the heritage product, LED, or pivot to Wolfspeed. There is this passionate group of talented LED employees; we want to get them in their own facility where they will no longer be the second story; they will be the primary story.
Randy: Will you keep the Cree name?
Mark: Yes, we have a license in perpetuity for the application rights and we have a fantastic relationship with the management. It wasn’t where one company won and another company lost. We made a fair deal that benefited both companies.
Randy: According to your investor call, you plan to have the lowest landed cost in the world, given the outsourcing with the sapphire substrate instead of silicon carbide. How will you use this cost advantage? To capture market share or improve margins?
Mark: There is a lot of overcapacity. Osram, Lumileds, and San’an all have much unused capacity. We want to leverage the overcapacity. But to answer your question, we want to earn higher margins, so we can reinvest back in the business. The ability to differentiate is directly related to the ability to invest.
Randy: Why the name Smart Global Holdings—it sounds like a holding company?
Mark: The model is a holding company model. We have four businesses under the holding company and our revenues are approaching $1.2B. They are four different businesses: high performance computing, memory modules, embedded computing and wireless IoT. All opportunities are unique to their own business. In the call I was asked, how does Cree fit our strategy. Cree is the same type of business, but with different customers.
At SMART, we are always looking for great technology companies. Cree was a natural fit and we are poised to recapture the leadership position they have had past.