An attorney called us for a client who was purchasing a competitor's wafer fab; that is, a factory that produces circuits from silicon wafers.
The lead attorney who represented the buyer was faced with a contract that needed to value the fab, in every aspect. That means that he had to come up with a way to estimate the value of the real estate, the facility and its cleanroom and support equipment, the production equipment, the chemicals and materials on hand, and, most difficult, the work in progress (WIP). To make matters more difficult, the legal team had prepared all of the documents but had no agreement as to how to value the components of the deal; and they were up against a looming deadline, of course.
Our job was to provide an acceptable model for each of these cost components, except for the real estate. They hired other experts for an appraisal of the value of the real estate.
For the facility, we built a model of the actual construction costs of the original facility and degraded that for normal wear and tear. That model was then overlaid with current costs of building an equivalent facility. A cleanroom is a unique part of the facility, classified by accepted standards and practices. Cleanrooms are very expensive to build and to maintain and are a major part of the cost of any fab, new or old. The fab at hand had a functional, but not state-of-art cleanroom. We developed a detailed cost model for the current value of the cleanroom in its current state and original classification. This was similar to the facility model but the current cost of new construction was replaced in this model by the cost of the retrofit upgrade to the current demands of that classification (Class 10).
A fab's support equipment consists of the utility feeds and controls, the chemical delivery systems, the water purification and delivery system, effluent treatment systems, and storage systems. Each of these systems was modeled on a basis of simple replacement costs degraded by the expected lifetimes of the equipment. The exception was that, in our opinion, the age of the water purification system precluded its use in an ongoing facility so we gave it no value, instead deducting the cost of a new system.
The actual process and test equipment values were modeled based on the replacement cost of each piece of equipment versus its expected lifetime. Again, an exception was made for the wet clean stations as they, in our judgment, should be scrapped and replaced. Hence, like the process water system, it was given a negative value based on the cost of full replacement.
The value of the fab's WIP is a difficult problem. Fab WIP is not valued by the worth of the end product but by the cost to process the wafer to that point in the process flow. Each step in the process adds more value to the wafer. Each step is different and has a unique associated cost, some steps are repeated and some are not. To make matters even more difficult, the fab runs several different process flows and each flow has, of course, its own set of process steps. That being very difficult, it is made more so by a changing product mix which means that the inventory of each flow is not stable but changes according to production demands from the sales force. We have done this kind of thing before and had constructed a cost model that could be applied to each process flow separately. Since we were unable to predict the product mix at the time of the deal closing, we chose to apply the model vs. the recent history of the product mix and the cycle time of each process flow.
This was all quite complex and difficult and, under normal conditions, would have required weeks of effort and frequent consultations with the fab's operational staff. Not having the luxury of time, nor the convenience of being allowed access to the fab's operational staff, we developed each of these models in a manner in which the buyer's staff could provide their own input. This was all done in a two-week period, working 12-16 hour days. At the end of the project, I met with our legal team and, through a day of discussion, described the model and how to use it. With a little bit of phone support, they managed to input all of the data and use the results to establish values for the contract.
After the deal had closed, I was informed that our efforts had saved the client many millions of dollars based on both party's acceptance of our model as a means of valuing the transaction.