William Sullivan, president and CEO of Agilent Technologies, spoke with Electronic News about his company’s divestiture of its semiconductor business, the future of test equipment and new opportunities in nanotechnology and life sciences. What follows are excerpts of that conversationElectronic News: Agilent has been doing some high profile divestitures lately, including your semiconductor business and your joint-venture stake in Lumileds. Where do you go next?
Sullivan: On 15th August, 2005, we announced a reorganization and focusing of the company. There were two messages. One was all about focus. The other was about value. I’m just absolutely convinced, along with the management staff and the board of directors, with Agilent being the premier measurement company in the world -- both in electronics and bioanalytical measurement -- that focusing the company on that market would create the best performance and substantial value for our shareholders. It’s no secret we have traded below the sum of the parts of our businesses for many years. We believe that setting up two companies, both semiconductor components and semiconductor test, both will be able to compete in the market as pure-plays.
Electronic News: This is the business Gestalt approach, then?
Sullivan: That’s the goal of every technology company -- to be able to trade greater than the sum of the parts. In reality, if you look at the history of diversified technology companies, it is very difficult to do that on a consistent basis. As a result, we tended to trade more with our semiconductor -- related businesses than we did with our life science or chemical analysis business. We’ve been very gratified with the initial response from our investors and Wall Street. In their purchasing of our stock, they have given their approval that this was the right decision to make. The proceeds we are receiving from these divestitures we are going to immediately return to our shareholders through a stock repurchase plan, which we have already commenced, and we have already retired our convertible debt.
Electronic News: Does this move Agilent heavily into the biotech arena?
Sullivan: If you look at the overall company, we believe that in 2006 we will be approximately a $5 billion measurement company. The largest part of that will still be in electronic measurement. But the percentage of life science and chemical analysis will be substantially higher given that we do not have the semiconductor-related business.
Electronic News: But ultimately aren’t you building off the same base?
Sullivan: Absolutely. If you look at the measurement market, it’s a $40 billion opportunity. Of that, $20 billion is in electronic measurement and $20 billion is in the bioanalytical market. We are the largest in this $40 billion market, and we believe we have an opportunity to grow faster than the rest of the market with our focus, as well as with opportunities we see in nanotechnology and homeland security.
Electronic News: Isn’t that just the tip of the iceberg in the biotech world?
Sullivan: When we define the measurement market inside of biotech, what we’re really focusing on is the instrumentation part and what I would call the sample preparation, the microarrays and the microfluidics that do a better job preparing the sample for measurement. There’s another part of the biotech market that includes molecular diagnostics that is substantially larger than what we define as the $20 billion bioanalytical market.
Electronic News: Will Agilent be a player in that market?
Sullivan: I believe that the new focused company has lots of opportunities to expand and grow our market position.
Electronic News: Are you taking advantage of the biotech research in California?
Sullivan: We’re quite excited by the opportunities in the biotech market in California. We want to be the leading supplier of tools to these development efforts. By having more money, not only in California but also the United States, it’s an opportunity for us to grow in the bioanalytical market. That has grown the fastest over the past three years of any segment inside of Agilent.
Electronic News: Where will your test equipment work in that market?
Sullivan: If you look at the bioanalytical market, there are various segments. A lot of the traditional bioanalytical testing is in petrochemicals, food testing, and pharmaceutical testing for quality assurance. Then there’s a whole other segment defined as life science, which is both traditional drug discovery as well as the understanding of DNA, proteins, and the identification of the pathways that result in the growth of tumors or some defect. The core engine for much of this analysis is in our liquid chromatography and mass spec, where a scientist or engineer will take a sample and separate or detect or measure exactly what is being done at the molecular level. We are working with scientists and researchers to develop additional tools, as well as additional bioinformatics, so they can put more samples through the measurement to get better sensitivity. And once the data is collected, they should have an easier time understanding what they have learned from the measurement they have made. I believe there is enormous opportunity. Medicine is almost in its infancy and in the biotech world, there are decades of learning in understanding the interactions of DNA, protein and RNA inside of our bodies.
Electronic News: With the convergence of multiple markets, the next big hurdle seems to be managing the information flow. This is testing and ongoing diagnostics. How much of a role does Agilent play in that market?
Sullivan: In terms of research, our focus has been on bioinformatics. Our focus is on helping researchers manage their labs better and to better understand the information they receive. That is where our focus is. But that’s just one small part of the enormous capability of managing data inside a research facility.
Electronic News: All of this data gets connected to everything else, though. Do you play in those markets, as well?
Sullivan: Today we are not playing in the biotech networking. In electronic measurement, we have a large play in managing the assurances of networks. Our focus has been in the wireless and wireline space to help service providers manage their networks. We are the largest operating system support company in the world. The focus has been on the electronics side today.
Electronic News: Does Agilent lose any insight into where technology is going by divesting its chip business?
Sullivan: Over the years, having electronic, chemical and semiconductor capability in-house has been an enormous strength for our people. I believe that where the market is going today, we will still have enough capability to truly understand the science of the physical layer, but leverage our capability to move up to higher levels of expertise. In the electronics sides, that’s the protocol, and in the bioanalytical, that’s bioinformatics. That’s where the future of the market is. We also will continue to have strong relationships with our partners. The new semiconductor company will continue to be a very strong partner.
Electronic News: So who does Agilent hire in the future? Is it engineers, or is it physicists and biologists?
Sullivan: We have always had a very broad range of expertise inside of the company. Seventy percent of the engineers inside the company are actually software engineers. We also are one of the few companies that still has a central research lab. Our Ph.D. physicists and biotech individuals fit inside of many of our disciplines. Our population is broader than just electrical and mechanical engineers.
Electronic News: How much can you leverage off the technology used in one market to tap into another?
Sullivan: Even though we’re focused on this $40 billion measurement market, the electronics customers are clearly different than the bioanalytical customers. The go-to-market strategies are very similar, though. It’s a direct sales force, it’s very high touch, and you have to have great products, great service and after-market service in both of these domains. It’s the central research facility’s responsibility to leverage the technology across these domains so we can do a better job in our target markets, and also to look at new opportunities in nanotechnology, which runs across this whole spectrum. And in homeland security, Agilent is uniquely positioned to be able to combine analytical capability with electronic capability. That is the opportunity to demonstrate synergy.
Electronic News: Can you define analytical plus electronic capabilities?
Sullivan: In the simplest sense, in electronics you measure electrons and photons. On the other side, you measure inorganic and organic material. One is a chemical process, the other is electrical. Many of the techniques on the analytical side come from the electronic side, but to be able to create a system of measuring air quality and tie that to some electronic system and to homeland security is a capability for which we are uniquely qualified. Our central lab should be able to understand the technology and be able to piece together the technology.
Electronic News: Where are your sales, from a geographical standpoint?
Sullivan: We are a global company. We participate in 110 countries around the world. The Agilent before the announcement of the reorganization had about 45 percent of its business in Asia. I don’t know what it will be after the divestiture, because so much of the semiconductor business is in Asia. But if you look at the life sciences and chemical analysis part, it tends to be dominant in the West. Our biggest growth opportunity is in Asia, though. People are interested in food testing, environmental testing, the quantification of Chinese medicine. In terms of pharmaceutical development, the big markets are the United States and Europe, but the big generic drug discovery inside of India is a big opportunity. On the electronic measurement side, manufacturing has clearly gone to Asia. But in terms of the research and development, that is still predominantly done in the U.S., Japan and Europe. We are also the primary supplier to the U.S. aerospace and defense industry, which is the largest in the world. We really do have opportunities on every continent.
Electronic News: Do you have more competition, as well?
Sullivan: We’re very fortunate to be the largest with the broadest breadth of products. We’ve just introduced synthetic instrumentation. We believe we’ll be in a leadership position and able to move from Department of Defense contracts into commercial use, and we are committed to be a broad-line supplier.
Electronic News: What is synthetic instrumentation?
Sullivan: That’s a term from the Department of Defense. It’s the creation of a configurable test system. They would like instrument blades, so you can configure an instrument, PC-controlled, so the upgrade, support and maintenance would be less expensive. Agilent Labs has developed the standard where we can synchronize signals over a standard Ethernet bus.
Electronic News: Where does the word ‘synthetic’ come from?
Sullivan: The name came from the government. The government wants reconfigurable instrumentation.
Electronic News: Because you’re in so many new markets, have your costs for R&D and sales gone up?
Sullivan: Our gross margins have gotten better, and we have committed this measurement company would have a 55 percent gross margin. We believe they will increase. We committed to Wall Street that we would have 14 percent operating profit and greater than 20 percent on invested capital. With this decision on 15th August, 2005, we projected we will exceed those numbers. Our research and development will drop slightly because R&D on semiconductor products tends to be higher than instrumentation, but our R&D commitment has not changed.
Electronic News: How big is your R&D budget?
Sullivan: Last year it was over $850 million.
Electronic News: As a percent of revenue, how much was that?
Sullivan: About 14 percent.
Electronic News: Will that change?
Sullivan: We are a technology company and we have to be the best. We are the partner of the engineer and scientist. Because of the refocusing of the company, we have reduced the volatility. We should be able to be cash positive through almost any economic cycle imaginable. Because of that, we have a nominal 14 percent. If the business goes down, it may go to 17 percent. If the business gets better, it may go to 12 percent. But we can absorb fluctuations better now than we could with a semiconductor business.
