Lead Manager

SECTION 3
BUSINESS OVERVIEW
The semiconductor equipment market has recently emerged from its worst downturn ever during 2001-2002, when
the market declined by over half. Babcock & Brown believes that in this period of overcapacity, device manufacturers
were hesitant to make new investments.The industry has now moved into the second year of a cyclical upturn with
factory utilisation running close to capacity and thus increased demand for semiconductor manufacturing equipment.
According to the Semiconductor Industry Association (SIA) the world market for semiconductors (chips) is
expected to increase from US$166 billion in 2003 to US$247 billion in 2007, growth of 48% in four years.This
increasingly global industry is forecast to achieve its fastest growth in the Asia Pacific region – 68% during this
period. Babcock & Brown believes that as both the content of chips in technology products increase together
with the pervasiveness of technology in every facet of daily life, this industry should remain one of unusually high
overall growth and capital intensiveness.
Asset trading
BBEM’s early successes include opportunistic asset trading in which BBEM purchased used equipment for resale,
usually after a relatively short holding period. BBEM has a profitable investment track record in asset trading since
commencing operations in June 2002. In 2003, BBEM equipment sales achieved an average 2.8x multiple on the
equipment purchased within approximately one year. Babcock & Brown believes that this performance will be
difficult to replicate in the current environment due generally to what BBEM perceives as increasing asset prices.
However, the market for used semiconductor manufacturing equipment is highly fragmented, illiquid and
inefficient and BBEM continues to search for attractive asset trading opportunities.
Case study Integrated equipment products and solutions
Over the last year BBEM has successfully targeted top semiconductor device (chip) manufacturers
like IBM, Micron, Samsung and Philips and has acquired over $30 million of used semiconductor
manufacturing tools from them. Babcock & Brown believes these opportunities were available because
these tools were either surplus to the customer’s current product generation, or because of changes in
the factory production schedule, the customer required far greater manufacturing capacity to meet
growing product sales. Because the equipment acquired was targeted and determined to be generic
manufacturing equipment, BBEM was successful in profitably redeploying the tools to other device
manufacturers like Samsung and IBM to build different technology products.
Operating leasing
BBEM expects to develop its operating leasing activities as the semiconductor market strengthens. BBEM expects
to target typical operating leases of 36 to 60 months in duration with a fair market value purchase option on
expiry. BBEM is often asked to acquire assets or configure a leased asset portfolio to help clients migrate and
cascade technology between different-generation products through advisory and trading services.
Case study Leading equipment manufacturers working with BBEM
As the cost of new equipment continues to rise approximately 15% per year, the cost of a new
manufacturing plant also continues to escalate. It is estimated that the cost of a new wafer
manufacturing plant today exceeds $2 billion with over 85% of the cost coming from the purchase of
semiconductor manufacturing equipment.
Recently, ASML, the largest lithography equipment-manufacturer in the world and with whom BBEM
currently has a successful secondary market equipment purchase and remarketing relationship,
requested that BBEM and ASML implement the financing segment of the contractual agreement to
include leasing for its worldwide customer base. Babcock & Brown believes that ASML’s objective was to
minimise the equipment cost versus production benefit, since ASML lithography equipment is
considered highly priced, but also has greater manufacturing output. Also, Babcock & Brown believes
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