Linear Technology, Inc.
Linear Technology, Inc.
1630 McCarthy Boulevard
Milpitas, California 95035-7487
Fax: (408) 434-0507
Sales: $265 million (1995)
Stock Exchanges: NASDAQ
SICs: 3612 Power, Distribution & Specialty Transformers; 3674 Semiconductors & Related Devices; 3679 Electronic. Components, Not Elsewhere Classified; 3699 Electrical Machinery, Equipment & Supplies, Not Elsewhere Classified
Linear Technology, Inc. develops, manufactures, and markets an array of high-performance linear integrated circuits (linear circuits use analog waves, as opposed to binary digits, to measure physical properties such as sound, pressure, weight, and light). The company’s products include audio amplifiers, voltage regulators, power management products, and other electronic devices. Other manufacturers incorporate those devices into computers, telephones, satellites, automobiles, and other end-user products.
The Making of a CEO
Linear Technology is the progeny of engineer and semiconductor industry pioneer Robert Swanson, who founded the company in 1981. With three former coworkers, Swanson built the fledgling Linear into a $100 million company in the span of a decade, and established Linear as a technological leader in its niche. A self-proclaimed goof-off, Swanson nevertheless displayed his desire, early on, to succeed at what interested him. He lettered in football, baseball, and hockey at his western Massachusetts high school during the 1950s, for example, and spent his summers as a lifeguard. It was during high school, in fact, that Swanson became intrigued with the burgeoning technology of semiconductors.
Swanson graduated from Northeastern University in 1960 with a degree in industrial engineering. Most colleges at the time were still teaching vacuum-tube technology, and semiconductors were in many ways considered to be experimental. But Swanson was fascinated by the promise of the technology. He started hunting for a job in the field, walking into prospective employers’ offices in Boston without a resume and asking for work. He turned down a $100-per-week offer from Polaroid to take a job with Transitron, then the nation’s second-largest chip manufacturer. It happened to be a great opportunity, as Transitron became a leader in military semiconductor applications. Swanson quickly became involved in a number of high-tech, high-profile projects, including the Polaris Missile program.
After three years at Transitron, Swanson yearned to move to California, where Silicon Valley was emerging as the center of the expanding semiconductor universe. After receiving a call from one of the soon-to-be famous founders of then-unknown Fairchild Semiconductor, he moved west. Swanson worked for chip pioneer Fairchild from 1963 to 1968 before joining National Semiconductor. He spent ten years at that company, helping it grow into one of the largest and most successful players in the chip business. But as National Semiconductor made the transition from a smaller, more entrepreneurial company to a big corporation, Swanson lost interest. “For 13 of 14 years at National, I was a gung-ho guy,” Swanson said in the May 13, 1991 Business Journal-San Jose. ’Then, the company started to get big. I kept looking at all the companies whose butts we’d been kicking. And then National started organizing itself like them. It was frustrating.”
Swanson was eager to jump ship and start his own company. He saw the opportunity to do that in the traditional analog chip industry. By the early 1980s the semiconductor industry was beginning to focus heavily on newer digital chips, which offered greater speed and power than traditional analog chips. But Swanson believed that, despite new technology, demand for analog chips would continue to grow. Importantly, analog chips were better than digital chips at measuring real world properties like pressure and temperature, and digital chips required support from analog chips in many applications. Swanson reasoned that, as digital chips increased the potential applications for semiconductors, demand for analog chips would continue to grow despite the fact that they would represent an increasingly smaller share of the overall semiconductor market.
1980s: The Startup
Swanson finally left National Semiconductor, and in 1981 formed Linear Technology. His goal was to develop analog chips, and to eventually profit from the growth in new applications created by digital chip technology. He took three fellow executives from National with him, and secured $5 million in venture capital funding. They subsequently hired away several of National’s most talented minds. Swanson’s former boss at National, Charlie Sporck, was furious that his former coworkers were now going to compete with his company. He tried to squelch the venture with lawsuits, claiming that Linear had stolen technology developed at National. “We did choose to compete against them, and they accused us of misappropriating trade secrets, or stealing,” Swanson told the Business Journal-San Jose. “But I’ll tell you, for every guy we hired away from National, ten applied.”
The tiny Linear Technology started out developing and supplying popular analog devices like voltage regulators. It initially found its niche as a second-source supplier, providing chips to buyers whose main suppliers failed to fill an order. By filling that role, Linear was able to get its foot in the door and show the marketplace that it could provide semiconductors that were cheaper, more reliable, and had more features than those provided by the competition. The second-source strategy was particularly effective during the chip boom in 1983 and 1984, when big suppliers reached capacity and equipment manufacturers had to turn to Linear to fulfill their analog semiconductor needs.
During the early 1980s, Linear used the cash flow from its successful, but relatively low-tech, line of analog chips to fund research and development of more advanced linear devices. The company’s goal was to become a leader in developing, making, and marketing advanced, high-profit analog chips that could be used in new applications made possible by digital technology. Such applications included miniature battery-powered devices, like cellular phones and portable computers, that required analog technology to, for example, regulate voltage or interpret analog sound waves. The challenge was to design analog chips that were simultaneously more powerful, more efficient, and smaller than those currently in use.
A Successful Strategy
Linear’s legal battles with National Semiconductor turned out to be its greatest challenge during its startup. National filed a series of lawsuits as part of an effort to quash Linear and reduce its competitiveness. But Swanson’s bet on the analog chip market paid off big, allowing Linear to overcome huge legal bills that might have ruined most startup companies. In fact, even when the overall semiconductor industry tailspinned in 1985, Linear was able to double revenues in the wake of surging demand for its analog chips. Linear’s success was due in part to its growing reputation for quality products and good customer service.
As important as its service and quality focus, though, was the simple fact that Linear was the biggest of only a handful of U.S. companies that had targeted the analog market instead of chasing digital technology. Furthermore, the analog chip industry differed from the digital sector in that the chips Linear produced were typically customized, and did not lend themselves to mass production. One important corollary of that attribute was that Linear was effectively excluded from the rash of Japanese competition that battered U.S. digital chip producers during the mid-1980s. Another advantage that Linear, as an analog chip company, enjoyed was a diversified customer base. That diversity reduced the risk many large digital chip manufactures faced in relying on a few major industries to buy its products.
A final boon for Linear was that it could rely on relatively old technology to produce its chips, while digital chip makers had to stay on the cutting edge to remain competitive. That allowed Linear to post big profit margins once it had successfully developed more advanced analog chips. “The digital guys have to constantly stay on the cutting edge,” Swanson said in Financial World. “They’re lucky if $1 of capital spending yields $1.50 of revenues. For us, $1 will generate $4 of sales.” Proof of that statement was eventually supplied by Linear’s bottom line. Linear invested heavily and posted net losses throughout the early 1980s. But, as annual sales rose past $20 million, Linear showed its first net income (of $1.17 million) in the fiscal year ending June 30, 1986, and would continue to boost profits every year into mid-1990s.
Linear went public with a May 1986 stock offering to raise expansion capital. During the next 12 months, its sales shot up 60 percent to $35 million, about $3.3 million of which was netted as income. To bolster its manufacturing side and keep up with increasing demand, Linear entered into an important partnership in June of 1987 with Texas Instruments. The deal gave Linear access to Texas Instruments’ advanced chip processing technologies and low-cost assembly and test facilities in Taiwan. In return, Texas Instruments was allowed to use several of Linear’s proprietary chips for relatively negligible royalties. That expanded production capacity helped push Linear’s sales to $51 million in 1988 and then to $65 million in 1989, by which time Linear was generating nearly $16 million in annual profits.
Growth in the 1990s
After wowing investors with big gains during the mid- and late 1980s, Linear went on to achieve even greater growth and profitability during the early 1990s. Linear’s engineers and marketers attacked almost every niche of the semiconductor market, producing specialized, high-tech analog chips that were incorporated into automobiles, cellular telephones, computer peripherals, satellites, medical instruments, and many other electronic products. “They’re basically in anything that has a switch,” said semiconductor industry analyst Carolyn Rogers in a 1992 Business Journal-San Jose article. Linear’s sales increased to $119 million in 1992, while net income rose to $25 million. Investors made the company a Wall Street darling, pushing its stock price to record highs quarter after quarter.
Going into 1993, Linear’s war chest was brimming with $100 million in cash that was waiting to be invested in new projects. And the company’s long-practiced strategy was still producing big profits. Indeed, by the mid-1990s Linear was the largest of only two big companies competing in the high-end analog circuit business. And foreign competition was still negligible, as Linear sold small volumes of specialized chips to American buyers, a market of little interest to Japanese producers of low-cost, mass-market chips. To take advantage of ongoing market growth, Swanson announced plans in 1993 to build a semiconductor wafer fabrication plant in Camas, Washington. Scheduled for phase-one completion in 1996, the plant was expected to consume up to $85 million in capital over a six to ten year period.
Linear sustained its rampant growth into the mid-1990s, increasing revenues to $150 million in 1993 and then to $201 million in 1994. Meanwhile, net income rose to $36.5 million and then to $56 million, evidencing the huge profit margins generated by Linear’s premium chips. Its performance earned it a reputation as one of the hottest prospects in Silicon Valley, and one of the best-managed companies in America. For the first five years of the 1990s, in fact, Linear was named to Forbes magazine’s Best 200 Small Public Companies. Likewise, in 1995 Business Week listed it as the 557th most valuable company in America. Semiconductor industry watcher In-Stat declared that Linear Technology Corp. was “the best financially managed manufacturer in the semiconductor industry.”
Linear boosted sales to $265 million in 1995, an impressive $84.7 million of which was netted as income. With sales continuing to surge in 1996, Linear remained focused on its strategy of developing and producing high-performance analog circuits for almost any application, ranging from factory automation and avionics to satellites and automobiles.
Linear Semiconductor Sdn. Bhd.
Coghlan, Paul, “Linear Technology Corporation to Build Wafer Fabrication Facility in Camas, Washington,” PR Newswire, July 29, 1993.
Goldman, James S., “Bob Swanson: Hard-driver Focuses on Low-tech Chips,” Business Journal-San Jose, May 13, 1991, p. 12.
Goldman, James S., “Linear Technology Profits in Manufacturing Analog Chips,” Business Journal-San Jose, October 19, 1992, p. 5.
Jones, Stephen, “Linear Tech Projects New Growth in Analog Chip Market,” Business Journal-San Jose, June 22, 1987, p. 9.
Plansky, Paul, “Reading Between the Headlines of Gloom & Doom,” Santa Clara County Business, November 1986, p. 15.
Twitty, Roy, “New Generation Multiple-output DC/DC Converters Power Notebook Computers at Constant Frequency,” Business Wire, January 31, 1996.
Wrubel, Robert, “Back to the Future,” Financial World, April 19, 1988, p. 48.
Yanish, Donna Leigh, “Linear Tech Seeks at Least $11 Million in Offering,” Business Journal-San Jose, April 21, 1986, p. 39.