Applied Materials Inc. (AMAT:US), the largest chipmaking-equipment supplier, agreed to acquire Tokyo Electron Ltd. (8035) 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 yesterday. Applied Materials shareholders will own 68 percent of the new entity. Shares of both companies surged.
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 (AMAT:US) 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 Inc. (BGCP:US) in Singapore. “This tells you there’s a problem in the industry.”
Applied Materials, based in Santa Clara, California, advanced 9.1 percent to $17.45 at the close in New York yesterday, the highest price since September 2008. The shares are up 52 percent so far this year. Tokyo Electron surged 13 percent to 5,490 yen at the close in Tokyo.
The consolidation among chip-equipment makers mirrors the increasing concentration within their customer base. Intel Corp. (INTC:US), Taiwan Semiconductor Manufacturing Co. (2330) and Samsung Electronics Co. (005930) now buy the majority of the production machines deployed by the industry, making the earnings of their suppliers more volatile. Veldhoven, Netherlands-based ASML Holding NV (ASML), Europe’s biggest chipmaking-tools supplier, completed its purchase of San Diego-based Cymer Inc. in May to expand in extreme ultraviolet lithography technology.
Tokyo Electron shareholders will get 3.25 shares for each share held in the Tokyo-based company, 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 million) loss for the three months ended June 30.
The offer values Tokyo Electron at 16.5 times earnings before interest, taxes, depreciation and amortization, compared with the median of about 11 times for more than 60 similar deals, according to data compiled by Bloomberg.
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,” Splinter said.
“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 a significant global footprint.”
The deal, which the companies described as a “merger of equals.” 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 told reporters in Tokyo yesterday.
Tokyo Electron has about $2.5 billion of cash and equivalents, reducing the company’s enterprise value to less than $7 billion, according to data compiled by Bloomberg. That makes the Applied Materials deal the biggest purchase of a Japanese company from outside the country since Citigroup Inc.’s $8 billion deal for a majority stake in Nikko Cordial Corp. in 2007, according to data compiled by Bloomberg.
The combined company forecast cost savings of $250 million in the first year after completion. 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.
Dickerson, who joined Applied when the company bought Varian Semiconductor Equipment Associates in 2011, was named president last year.
“He’s extremely well thought of in Asia and Japan,” Ho said. “He’s very highly regarded within the Tokyo Electron circles. He was the key catalyst in getting this deal done.”
Goldman Sachs & Co., which was Applied’s adviser on the deal, said the transaction was the first ever stock-for-stock merger between a U.S. and Japanese company. Mitsubishi UFJ Morgan Stanley Securities Co. advised Tokyo Electron.
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