Chip-equipment sector retrenchesApplied Materials, the largest chipmaking-equipment supplier, agreed to acquire Tokyo Electron for $9.39 billion in stock in the largest deal for a Japanese company from outside the country in six years.
Gary Dickerson, who was promoted to chief executive officer of Applied Materials this month, will be CEO of the combined manufacturer, the companies said in a statement. Applied Materials shareholders will own 68 percent of the new entity.
Dickerson, who replaced Mike Splinter as CEO, is moving to consolidate the industry across continents amid slowing demand for equipment used to prepare silicon during the early stages of chip fabrication. Applied Materials in August forecast revenue that missed analysts’ estimates for the second straight quarter amid a record slump in the personal-computer market and muted semiconductor demand.
“It’s a defensive strategy because R&D costs are going up and the number of customers is going down,” said Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners in Singapore. “This tells you there’s a problem in the industry.”
The consolidation among chip-equipment makers mirrors the increasing concentration within their customer base. Intel, Taiwan Semiconductor Manufacturing and Samsung Electronics now buy the majority of the production machines deployed by the industry, making the earnings of suppliers more volatile. Veldhoven, Netherlands-based ASML Holding NV, Europe’s biggest chipmaking-tools supplier, completed its purchase of San Diego-based Cymer in May to expand in extreme ultraviolet lithography technology.
Applied Materials, based in Santa Clara, California, advanced 9.1 percent to $17.45 at the close in New York, the highest price since September 2008. The shares are up 52 percent so far this year.
Tokyo Electron shareholders will get 3.25 shares for each share held, and CEO Tetsuro Higashi becomes chairman of the new entity. Tokyo Electron, the No. 2 maker of chip-production machines, reported a 3 billion yen ($30.4 million) loss for the three months, ended June 30.
The offer values Tokyo Electron at 16.5 times its earnings before interest, taxes, depreciation and amortization, compared with the median of about 11 times for more than 60 similar deals.
The companies make machines that prepare silicon wafers for imprinting with the circuits that turn them into processors capable of crunching numbers, showing video and connecting to mobile networks, among other tasks.
A combined Applied Materials and Tokyo Electron can better navigate an industry that’s under pressure as consumers shift to lower-cost devices, according to Ben Pang, an analyst at Northland Capital Markets.
Spending on semiconductor equipment is projected to decline 8.5 percent to $34.6 billion this year, hurt by shrinking investment by semiconductor manufacturers, according to Gartner Inc. Spending by the top five chipmakers will make up more than 65 percent of total 2013 spending, the Stamford, Connecticut-based research firm said.
“It is an industry-landscape-changing move,” said Splinter, who is chairman of Applied Materials. Broader costs for chipmakers are going up, he said. “With this combination, we should be able to enable the technology better and be the lowest-cost supplier at the same time.”
“It brings complementary products and technology to what Applied already has,” said Patrick Ho, an analyst at Stifel Nicolaus & Co. who owns the stock. “The second thing they bring is a significant global footprint.”
The deal, which the companies described as a “merger of equals,” values Tokyo Electron at about 6 percent more than yesterday’s closing price. Applied Materials shareholders will get one share in the new company for each they hold.
“It’s best for major U.S. companies and Japanese companies to join hands in terms of costs and technology platforms,” Higashi said Tuesday.
The combined company forecast cost savings of $250 million in the first year after completion of the deal. The company also plans to buy back $3 billion in stock in the first 12 months after the deal closes.
Tokyo Electron intends to complete the transaction as early as the middle of next year, Higashi said. Pang at Northland Capital didn’t anticipate any antitrust hurdles that would prevent the merger from getting done.
“In each of the segments that they compete in, there is absolutely another competitor right now,” Pang said.
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