Sumitomo Doubles Down and Purchases CDT while OSRAM Folds

In the period of less than one week, two very successful and well-capitalized high tech companies took a look at the same business opportunity—polymer based OLEDs (P-OLED)—and executed the exact opposite strategy. Sumitomo, presumably closer to the technology, saw the potential to be a leader in the emerging conductive polymer and display market and invested heavily. OSRAM, presumably closer to the market, saw the risks of competing using new technology in the high stakes display market and decided to exit. What follows is an analysis of both company’s moves.

Sumitomo Chemical Company and Cambridge Display Technology (CDT) jointly announced that they have entered into a definitive merger agreement whereby Sumitomo will acquire CDT. For the past several years, CDT struggled to generate revenue as the P-OLED material performance was overshadowed by fluorescent and phosphorescent small molecule material in terms of luminous efficiency and lifetime. One of the key advantages of P-OLED material is the capability to be deposited and patterned using solution based processes that incorporated ink-jet printing (IJP). CDT invested heavily in Litrex, the leading supplier of IJP technology and just as the technology was ready for commercialization, CDT was forced to sell Litrex to ULVAC to generate cash. Unfortunately, no OLED panel maker was able to commercialize full color P OLEDs and the benefits of solution processing have not been recognized in the market. Moreover, the few panel makers that produced P-OLED passive matrix displays have all exited the market. Philips, OSRAM and Delta Optronics tried to compete in the small panel market but were never able to overcome the limits imposed by lower material performance and monochrome displays. As a result, CDT’s royalty revenue is dropping to virtually nothing. The only company currently active in the P-OLED model is MED, which expects to produce OLED microdisplays by the end of the year.

One wonders with such negative performance: Why would Sumitomo pay twice the market price for CDT? Sumitomo does not enter the transaction blindly, as it is a 50/50 partner with CDT in material producer Sumation, which was initially created with the remnants of the Dow Corning P OLED unit. Recently Sumation has been showing near exponential progress in material efficiency and lifetime. In addition, there are a number of positive signs for solution based OLEDS and CDT:

• Matsushita, TMDisplay, Dai Nippon Print and Casio have licenses with CDT and are committed to P-OLED technology
• Casio recently demonstrated AMOLEDs at the SID using color, IJP, P-OLED material and a-Si backplanes
• CDT is near commercialization of an IC that will extend the size and resolution of PMOLEDs into the sweet spot of mobile phone displays. CDT could get a royalty or a driver chip sale in a 500M unit market if the chip can support QVGA resolution on PMOLEDs whether they are small molecule or P-OLEDs.
• • Litrex has delivered 7th Gen IJP equipment to TFT LCD manufacturers for use in the production of color filters and cells indicating that the IJP equipment will scale and can function in a high resolution and high pixel density environment

Large bets are being made by GE, Konica Minolta, OSRAM, Philips, Siemens and Mitsubishi on the use of OLEDs as a commercial lighting device to replace incandescent and fluorescent lighting. Many believe that P-OLEDs and R2R manufacturing represent the most cost effective approach to competing in this very price sensitive market.

The CDT investors get a payout, less than they wanted but probably more than they deserve. So CDT, short of cash but long on promise, sells itself to Sumitomo. If Sumitomo is willing to invest in the technology and they are already into it by more than US$300M, they could become a major player in the >US$500B display and lighting market.

Under the merger agreement, Sumitomo Chemical will acquire all outstanding shares of CDT common stock at a price of $12 per share in cash, for an aggregate purchase price of approximately $285 million. The merger consideration represents a 107% premium over CDT’s 90-day average closing share price and a 95% premium over CDT’s closing share price of $6.15 on July 30. Kelso and Company and certain of its affiliates and certain members of CDT’s senior management, holding in the aggregate approximately 43% of the outstanding shares of common stock of CDT, have entered into agreements with Sumitomo Chemical to vote all of their shares of CDT common stock in favor of the transaction. CDT and Sumitomo Chemical have developed a more integrated and closer relationship since Sumitomo acquired a license to P-OLED IP from CDT in 2001, culminating in the formation of a 50/50 joint venture in 2005 to develop, manufacture and sell P-OLED materials to CDT licensees and others. In a press release, David Fyfe, Chair and CEO of CDT, said, “We have admired the long-term commitment of Sumitomo Chemical to the development of this very important technology and believe this merger is not only in the best interest of our shareholders but also of our employees and the global display industry.”

Hiromasa Yonekura, President of Sumitomo Chemical, said: “In recent years, Sumitomo Chemical has positioned its display materials business as one of its strategically important business areas and an area of focus for our business resources. OLEDs are expected to see considerable market growth in the future as next-generation materials for flat panel displays and lighting applications, and our company is actively engaged in the development of new materials and the improvement of device technologies. We have built a close cooperative relationship with CDT up to this point, and the complete integration of both companies’ technological and intellectual assets through this acquisition will make it possible to greatly accelerate development. We are very grateful for the support of the CDT board of directors and major shareholders, and I am pleased to extend a warm welcome to all our colleagues at CDT on behalf of Sumitomo Chemical.” Completion of the merger is subject to CDT stockholder approval and other customary closing conditions. The acquisition is expected to close during Q3’07 or Q4’07.

Almost concurrently with the CDT sale, the last P-OLED display manufacturer, OSRAM Opto Semiconductors, a subsidiary of OSRAM, announced it will be exiting the production of PMOLED technology at the end of this year. The company will shift its OLED activities to developing market-ready OLED lighting solutions using small molecule material. As a result, the display manufacturing line in Penang, Malaysia, will cease production at the end of the year. The 270 employees there will be transferred to other activities within OSRAM Opto Semiconductors including the new LED chip production facility in Penang. Jobs are being sought in other parts of the company for the OLED product team in the USA. No employees in Germany are affected. OSRAM Opto Semiconductors will honor the existing obligations toward its customers. Since the end of 2003, OSRAM Opto Semiconductors has been manufacturing and marketing PMOLED displays under the brand name Pictiva. Worldwide demand for the displays, which are used predominantly in communication systems, industrial applications and mobile consumer electronics, has lagged far behind the company’s expectations. In early July, OSRAM broke ground for a new LED fab, in Penang, which will create about 800 jobs. In addition, the company announced an increase in backend capacity in that region by 50%. For the new facilities, OSRAM has invested a double-digit million euros. The new fab is scheduled to ramp up production in the Q1’09. According to the spokesperson, the Penang production will not be at the expense of the company’s production in Regensburg, Germany; the company plans to increase its production there as well. A team of 50 people is currently working in the research center in Regensburg on the development of products and production methods for OLED lighting. “The experience we have gained in the display sector will speed up the process considerably,” said Müller, OSRAM CEO.

This failure could be positioned as just another example of the lack of P-OLED performance, but it needs to be examined in more detail. OSRAM was slow to execute and seemed to always take the easy way out. They did not compete in the high stakes, highly competitive mobile phone and MP3 markets. Instead, they opted for the low performance and low volume niche markets. The company was never able to produce a color display and never upgraded to the higher performance materials developed by Covion (now Merck) or Sumation. In fact, OSRAM uses the same material in 2007 as it did in 2003, when it began. In an industry that thrives on performance improvement, and leveraging the use of capital to reduce costs and increase volume, OSRAM was reluctant to invest in new materials, color displays, larger fabs and active matrix backplanes, and it appears to be manufacturing-driven, never wanting to improve the process to risk change. It could not adapt to new materials and was at a disadvantage from a cost and volume perspective to LCDs. OSRAM has never reached a break-even volume with a maximum of 100K panels per month, compared to millions produced by LCD manufacturers. By failing to adapt, OSRAM was unable to compete and has now abandoned the technology. In the end, the accountants won by starving the fledgling business and then choosing to close down the operation after the assets were fully depreciated. OSRAM would argue that they are not abandoning the technology and have just switched their attention from displays where they had little experience to lighting where they are a leader. However, one wonders why they chose to abandon all of their experience and expertise with P-OLEDs to switch to small molecule material.