Bloomberg News

Lam Research Agrees to Buy Novellus Systems for $3.3 Billion

December 16, 2011

(Updates with closing share price in ninth paragraph.)

Dec. 15 (Bloomberg) -- Lam Research Corp. agreed to buy Novellus Systems Inc. for about $3.3 billion in stock, combining two of the chip-equipment industry’s biggest companies in a challenge to market leader Applied Materials Inc.

The transaction values Novellus at $44.42 a share, Fremont, California-based Lam said yesterday in a statement. That represents a 28 percent premium over Novellus’s closing stock price before the deal was announced. Lam also said it will buy back $1.6 billion in shares.

By teaming up, the companies aim to cut expenses and keep pace with the latest innovations in chipmaking gear, which creates semiconductors out of pieces of silicon. Their equipment works at different stages of the manufacturing process, helping make the products complementary, according to Edwin Mok, an analyst at Needham & Co. in San Francisco.

“Strategically, they’re definitely a fit,” Mok said. The combination will let them take on Santa Clara, California-based Applied Materials, which sells a wide array of chip-production equipment, he said.

When the deal is completed, Lam shareholders will own 59 percent of the new business, with Novellus investors holding the rest, according to yesterday’s statement. The acquisition will result in annual cost savings of about $100 million by the fourth quarter of 2013, Lam said. The deal will begin adding to earnings within 12 months of its completion, the company said.

Smaller Premium

By making the $1.6 billion stock repurchase, the combined company will limit how much the deal dilutes the stock. The two companies will have a combined $3.1 billion in cash and $1.7 billion in long-term debt after the transaction closes.

Equipment from Novellus, which is based in San Jose, California, deposits materials on silicon wafers in the process of building up the layers that become electronic circuits on computer chips. Lam’s machinery, meanwhile, removes materials not needed in the final product.

Lam is paying a smaller premium than the average paid by buyers of semiconductor-equipment makers in recent years. In deals valued at more than $250 million during the past five years, acquirers have paid an average premium of 56 percent, Bloomberg data show.

Novellus shares rose 16 percent, or $5.67, to $40.37 today in New York trading. Lam declined 8.4 percent to $36.17. The stock has fallen 30 percent this year.

‘Very Good Deal’

Lam’s purchase is the largest in the industry since Applied Materials announced plans in May to buy Varian Semiconductor Equipment Associates Inc. for $4.9 billion in cash. In that deal, Applied paid a 55 percent markup over Varian’s closing price -- almost double the premium in the Novellus acquisition.

Lam investors are paying a fair price for Novellus, said Patrick Ho, an analyst at Stifel Nicolaus & Co. in Dallas. The transaction would make Lam the fourth-largest chip-equipment maker, behind Applied, Tokyo Electron Ltd. and ASML Holding NV. Tokyo Electron may have been interested in purchasing Novellus itself, he said.

“At first glance, it appears like a negative for Applied and Tokyo Electron,” Ho said. “This is a very good deal from a fundamentals standpoint.”

Lam is counting on the merger to stay abreast of new technologies, such as 450-milimeter silicon wafers and chips built with three-dimensional structures to boost performance.

CEO Change

While Lam has been more successful winning orders from memory-chip makers like Samsung Electronics Co., Novellus has done well with processor producers, such as Intel Corp., said Martin Anstice, Lam’s president and chief operating officer. He will become chief executive officer of the company on Jan. 1, replacing Steve Newberry, a transition that was previously announced.

Together, the two companies will have a presence at all of the top 10 chipmakers, Anstice said. They will use their combined sales force to win more orders, he said.

Timothy Archer, Novellus’s chief operating officer, will take that same title at the combined company, and Lam’s finance chief, Ernest Maddock, will retain that role after the merger. The board, meanwhile, will add four new directors jointly nominated by Lam and Novellus. The companies expect the deal to close in the second quarter of next year.

Lam received financial advice from Goldman Sachs Group Inc., and its legal adviser was Jones Day. Bank of America Corp. advised Novellus, while Morrison & Foerster LLP provided the company’s legal counsel.

--Editors: Nick Turner, Stephen West

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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