Varian Associates Inc.

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Varian Associates Inc.

3050 Hansen Way
Palo Alto, California 94304–1000
U.S.A.
(415) 493–4000
Fax: (415) 424–5994

Public Company
Incorporated: 1948
Employees: 8,500
Sales: $1.5 billion
Stock Exchanges: New York
SICs: 3671 Electron Tubes; 3674 Semiconductors; 3826
Analytical Instruments; 3841 Surgical and Medical
Instruments

Varian Associates Inc. is a diversified, international electronics company that designs, manufactures, and markets high–technology systems and components. Varian’s major product lines include radiation equipment for cancer therapy; analytical instruments for science and industry; semiconductor manufacturing equipment; and electron devices for advanced applications in defense, industry, and research. Recognized as a global technological leader, Varian was a pioneer of the renowned high–tech hotbed of Silicon Valley, California.

Varian Associates was started in 1948 by brothers Russell (Russ) and Sigurd (Sig) Varian. Although they started with only $22,000 and a handful of employees, the Varian team was brimming with technical know–how. In fact, the Varian story dates back to at least the late 1930s, when the Varian brothers put their heads together to develop the famed klystron tube. The United States was faced with the need for improved navigational aids for its fledgling aviation industry as well as the possibility of war. The Varians’s idea won them $100 for materials and part–time use of a laboratory at Stanford University. The goal of the project was to create the electron tube, a device that is capable of directing a beam of electrons and could, therefore, be utilized in a number of new applications.

The klystron was invented in the summer of 1937 and formally introduced in 1939 in the Journal of Applied Physics. European scientists were feverishly trying to develop similar technology at the time, so the announcement was welcomed in England. In fact, the United Kingdom wasted no time in adapting klystron technology to provide a lightweight source of microwaves for their radar receivers. By 1940 the Royal Air Force had equipped its night fighters with klystron radar receivers, which helped England defend its shores and claim victory in the Battle of Britain.

The Klystron Project team continued to advance its new technology during World War II. Later, team members would recall not only the Project’s scientific achievements, but also its contribution to technology management. Because of the war, team members were forced to couple their discoveries with real social needs rather than simply advancing technology for its own sake. Besides playing a role during World War II, the klystron was credited with initiating the microwave industry. Among other distinctions, microwave technology made commercial air navigation safe, allowed the development of worldwide communications satellites, and spawned numerous breakthrough devices, such as high–energy particle accelerators, that were integral to the advancement of medicine and nuclear physics.

After the war, the Varians and some of their Klystron Project peers decided to start their own company in California. They suspected that klystron technology was too expensive for them to get into on their own, but they felt that other emerging technologies, such as nuclear magnetic resonance, offered potential. So, with $22,000 and no real plan for exactly what they were going to do, the group started Varian Associates. The original company consisted of the Varians, Fred Salisbury, Myrl Stearns, and Russell’s wife, Dorothy.

Although they were dwarfed in terms of size and capital by their competitors, smallness turned out to be their greatest advantage. When the government solicited bids for a klystron development project after the War, few manufacturers were interested because it offered an unrealistically low allowance for overhead. But Varian, with negligible overhead, decided to take on the project and soon developed the R–l klystron. Its success with that project helped it earn several other government and private sector jobs, and attract top scientific talent. During the following ten years, in fact, the Varian think tank produced a string of major breakthroughs related to various electronic technologies.

Among Varians’s most recognized early achievements was its development of nuclear induction, or nuclear magnetic resonance (NMR), technology. NMR revolutionized chemistry by allowing chemists to quickly determine the structure of molecules. Russ Varian had tracked the development of NMR at Stanford and Harvard during World War II, and he hired Martin Packard, a key NMR researcher, to head Varian’s project. “Prior to the use of NMR... you could spend literally months and years trying to determine the structure of a molecule,” Packard explained in Varian archives. “With NMR, infrared, mass spectrometry, and other such tools, the same problems can often be solved in hours, and the whole field of chemistry has been able to undergo a much more rapid advance and expansion.” Varian and Packard applied for a U.S. patent on their ideas related to NMR in 1948.

Varian soon built upon its successful development of klystron and NMR technologies. The company eventually integrated klystron technology into a range of new applications for the telephone, radio, television broadcast, satellite, radar, and related communications industries. Likewise, Varian used NMR technology to develop a line of scientific instruments used in chemistry, physics, biology, medicine, and other fields. Varian opened its Palo Alto Microwave Tube Division in 1953 in Building 1 of the Stanford Industrial Park. The facility became known as the first high–tech industrial park in the United States and signaled the beginning of Silicon Valley.

Another major technological breakthrough ascribed to Varian in the 1950s was the medical linear accelerator. A linear accelerator is a machine used to produce x–rays, electrons, and other high–energy particles. It was invented by Bill Hansen and Ed Ginzton, both of whom had worked on the Klystron Project, joined Varian early on as directors, and served as consultants to the company. Varian’s goal for its medical linear accelerator project was to take the large, clumsy linear accelerator, or linac, and shape it into a compact, agile device that doctors could use to accurately distribute dosages of particles to the human body.

In collaboration with Stanford Medical Center, Ginzton led the evolution of klystron technology to create the Varian Linac accelerator, the first practicable medical accelerator. The device soon became an important tool in the research of cancer treatment with radiation. Although implementation of the device in the private sector took several years, Varian used technology developed in the Linac project in other ventures and was eventually able to parlay the breakthrough into a marketable line of medical apparatuses. Considered one of Varian’s crowning achievements, the resulting Varian Clinac line of radiotherapy systems would become Varian’s most successful product line.

Besides the klystron, NMR, and linear accelerator, a fourth major breakthrough for Varian was its electronic vacuum pump. Until the mid–1950s a major hurdle to the manufacturing of vacuum tubes was contaminants that attached themselves to the tubes’ innards and shortened tube life. Part of the problem was debris from oil diffusion pumps that were used to create the vacuum in the tubes. Varian began experimenting with gas discharge “sputtering,” which lead to the sputter–ion pump. It turned out that, in addition to creating cleaner vacuum tubes, the pump was more portable, required no cooling water, and had a number of other beneficial attributes.

Varian developed a marketable pump called the Vaclon Pump in 1958, and in 1959 launched an entire business division based on the new technology. Varian delivered some of its first pumps to RCA, the Atomic Energy Commission, and NASA. The division flourished during the 1960s as the Vaclon Pump spawned several product lines for a variety of different applications. Most importantly, Varian’s vacuum pump technology later provided ingress into the burgeoning semiconductor industry. Varian gradually honed important technology related to ion implantation and thin–film coating that became integral to the semiconductor fabrication process.

Because of its technological prowess, Varian earned a reputation as a leading technological innovator during the 1950s and 1960s. The same praise could not be applied to its business accomplishments, however. Despite a flurry of highly marketable product introductions, Varian’s financial performance was spotty. Indeed, the company was so intently focused on the exciting science and engineering game that it sometimes ignored the bottom line. That resulted in part from the fact that most of the company’s workers and managers had formerly been (and often continued to be) associated with academia. One well–known story within the company is of an engineer that invented a computer printer capable of printing enough data to cover a football field. When asked who in the world would want such a device, the engineer replied, “Lawrence Livermore Laboratory. They’ll buy one of everything.”

To Varian’s credit, the academic environment had allowed its scientists to innovate and achieve. Nevertheless, the company suffered from erratic profit performance because of its lack of business savvy. Business boomed in the late 1950s. In the early 1960s, though, its government contracting business dried up and the company nearly went bust. The company staged a comeback in the mid–1960s by emphasizing nonmilitary markets. But by the late 1960s Varian was in financial trouble again. Varian brought in a new, business–oriented manager in 1971 who made several seemingly smart moves. Varian purchased a minicomputer company, for example, and eventually grabbed about ten percent of that growing market. Indicative of the overall company performance, however, Varian scientists had trouble adapting to fast–changing markets and the company was unable to control manufacturing costs. The computer division languished and was jettisoned in 1977.

Varian had about $640 million in sales in 1981 from its growing and diversified high–tech product lines. Unfortunately, it also lost $3.6 million. In another bid to bring its balance sheet in line with its technological ability, Varian brought in a new president in 1982, Thomas Sege. Sege was a 55–year–old former Yugoslavian who had escaped from the country in 1940, shortly before Hitler invaded. Sege believed that Varian’s problems stemmed from its loose, splintered environment. “The name ‘Varian Associates’ is significant,” he noted in Forbes,” It means a loose association of people doing their own thing.... We had a number of small shops with small objectives.”

In an effort to rectify the situation, Sege quickly established tight controls over inventories and receivables and tied manager pay and incentives to financial performance. He also started selling or closing marginal operations that were losing money, and diversifying into new businesses that promised to complement existing technologies. Although some researchers and managers resisted the change in the working environment, others welcomed the new direction and the feeling of an overall corporate focus. The changes seemed to work. In 1982 Varian announced the first of what would be three years of consecutively improved results, ending with record sales ($973 million) and earnings ($69.7 million) in 1984. During the mid–1980s, moreover, recovering defense markets boosted revenues over $800 million.

Although Varian’s financial performance improved during the early and mid–1980s, its successes were short–lived. Varian’s sales continued to surge, but profits were spotty and the company failed to become integrated. Under Sege’s direction, Varian made a number of acquisitions, many of which it later dumped. By the late 1980s Varian was generating more than $1 billion in sales from its diversified, global operations. But it had also become an unwieldy, barely profitable techno–behemoth with 20 decentralized divisions. “They are not very well managed and have a history of problems,” noted industry analyst Carolyn A. Rogers in the Los Angeles Times.

Despite Varian’s business shortcomings, the company continued to be recognized as a leader in electronic–related technology. For example, Varian had introduced several major innovations in the semiconductor industry and had become a major player in specific segments of the health care industry, particularly those related to cancer treatment. In fact, by the early 1990s Varian had captured more than half the global market for radiation therapy equipment. Varian also retained a leadership role in instrument and electron device markets.

However, Varian had been criticized for being too focused on technology and for offering only ultra–high–end, premium products and ignoring the sometimes larger middle market. Likewise, the company had acquired a reputation for investing heavily in questionable new technologies. For example, Varian developed a system that could be used to irradiate produce, thus killing bugs and extending shelf life. The product never made it to market, though, because of glitches related to federal approval. “You just can’t experiment without thinking about the bottom line,” analyst Stephen Balog told Fortune.

In an effort to capitalize on Varian’s strong product and market position, Varian called Tracy O’Rourke to the helm in 1990 and Sege stepped aside and became vice–chairman. The 54–year–old O’Rourke boasted a track record of management successes. Most notably, he was credited with turning around the Allen–Bradley division of Rockwell International, a major high–tech defense contractor. He had taken that company from $450 million to $ 1.4 billion in sales, all the while improving profits and margins. O’Rourke was known as a visionary with a knack for international expansion. At the time of his arrival, Varian was similar to Allen–Bradley in both size and markets served, with $1.3 billion in 1989 sales and an international work force of 12,000.

Immediately after his arrival O’Rourke designed and began to implement a three–phase restructuring program aimed at whipping the technological giant into financial health. “Like a hummingbird, we were going from opportunity to opportunity, only to abandon them when the competition got too hot. We were simply spreading ourselves too thin,” O’Rourke explained in Industry Week. During the first phase of O’Rourke’s program, which Varian completed during the early 1990s, Varian sold 11 languishing divisions and product lines for $60 million, closed nonperforming units, and initiated a massive labor reduction designed to eventually pare about one–third of Varian’s 12,400–member work force.

That effort alone allowed Varian to post a record profit of $58 million in 1991 following a depressing loss in 1990. Phase two of the process, which was started in 1992, was a long–term goal of significantly improved quality and service. O’Rourke wanted to consolidate and streamline the entire organization, reduce the amount of time required to take new ideas to market, and develop a customer–oriented culture. “People had fallen into the habit that it was o.k. to be late,” O’Rourke recalled in Industry Week. “As a result, customer shipments from some of our core businesses would lag, sometimes by several months.” Finally, O‘Rourke’s third phase entailed the development of a long–term profit and growth strategy designed to take Varian into the 21st century.

By 1994, the effects of O’Rourke’s efforts were already apparent. Although sales hovered around the $1.3 billion mark, sales per employee jumped more than 50 percent and earnings ranged between $45 million and $60 million during 1991, 1992, and 1993. Order backlogs were reduced significantly, and quality control improved. Furthermore, Varian slashed its total corporate debt from about $110 million in 1989 to almost zero in 1993. Importantly, Varian boosted research and development spending, reflecting O’Rourke’s intent to sustain Varian’s legacy of technological leadership.

Going into the mid–1990s, Varian operated its subsidiaries through four core businesses: health care systems (30 percent of 1993 sales); instruments (27 percent); semiconductor equipment (22 percent); and electron devices (21 percent). In 1994, Varian was the world’s leading supplier of cancer radiation equipment, the top developer and producer (by sales volume) of analytical instrumentation for studying chemical composition of matter, one of the largest manufacturers of semiconductor fabrication equipment, and a leading U.S. supplier of microwave–related equipment, particularly for satellite communications. Varian operated more than 50 sales offices outside of the United States (and about 40 domestically), with about 43 percent of revenues coming from foreign shipments. A steadily rising stock price in the first half of the 1990s suggested market confidence in Varian’s long–term potential, as the company’s share price climbed to an all–time high ($46 per share) and it posted record sales and earnings in 1994–95.

Principal Subsidiaries

Oncology Systems; X–Ray Tube Products; Nuclear Magnetic Resonance Instruments; Vacuum Products; Ion Implantation Systems; Thin Film Systems; Power–Grid Tube Products; Microwave Equipment Products; Microwave Power Tube Products.