Applied Materials Inc. (AMAT:US) Chief Executive Officer Gary Dickerson has cut deals throughout his career in the semiconductor industry. In landing his biggest purchase, he’s even moving his family to Tokyo from California, people with knowledge of the matter said.
Applied Materials agreed this week to acquire Tokyo Electron Ltd. (8035) for $9.39 billion in stock in one of the largest purchases of a Japanese company by an overseas buyer. Dickerson spent nine months working out the details of the deal and prevailed over resistance in Japan to foreign takeovers.
Dickerson is unifying two of the largest chipmaking-equipment companies in a bid to stay ahead as customers in the semiconductor industry consolidate. The deal will help the maker of machines that cut circuits into silicon wafers invest more in research and development as demand for processors shifts to those used in smartphones and tablets.
“You’re either number one, or you’re struggling to survive,” said David Rubenstein, an analyst at Advanced Research in Tokyo. “The golden years are over. You have consolidation in a mature industry.”
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.
Intel Corp. (INTC:US), Taiwan Semiconductor Manufacturing Co. (2330) and Samsung Electronics Co. (005930), the three largest customers for both Applied Materials and Tokyo Electronic, account for most purchases in an equipment industry that Rubenstein estimates is worth about $40 billion a year. The companies have trimmed spending in response to a record slump in the personal-computer market.
The companies’ advisers don’t expect the acquisition to be blocked by regulators because the two companies manufacture different products that complement each other, said a person familiar with the deal who requested anonymity because the discussions are private.
Applied Materials, the largest chipmaking-equipment supplier, and Tokyo Electron, the biggest in Japan, projected cost savings of as much as $250 million within a year after the transaction is completed.
A chip-industry veteran of three decades, Dickerson had negotiated Applied Materials’ $4.9 billion cash acquisition in 2011 of Varian Semiconductor Equipment Associates Inc., where he served as CEO at the time.
The purchase of Tokyo Electron required Dickerson to overcome a history of Japanese opposition to takeovers by overseas companies, perceived as threats to job security.
“The biggest obstacle to acquisitions from overseas are Japanese employees,” Yuuki Sakurai, CEO of Fukoku Capital Management Inc. in Tokyo, said in a phone interview. “We place importance on stable employment rather than the rights of shareholders.”
While the deal will leave Applied Materials shareholders (AMAT:US) with 68 percent of the new company, Dickerson and Tokyo Electron CEO Tetsuro Higashi described it as a “merger of equals.” That may have helped Tokyo Electron save face, Sakurai said.
“When you look at the reality, it’s an acquisition by Applied Materials,” Sakurai said.
Dickerson, who will be CEO of the combined company, will move to Tokyo with his wife and two children, said people with knowledge of the deal who asked not to be identified because they aren’t authorized to publicly comment about its details. Higashi will be chairman, and the new company will have dual headquarters in Santa Clara and Tokyo.
Dickerson and Higashi have known each other for 30 years and have “a very strong friendship,” Dickerson said on a conference call.
Even so, after Applied Materials first approached Tokyo Electron about a possible deal, the companies spent three months considering it, Higashi said at a press conference in Tokyo Sept. 24. The U.S. company suggested the deal at a semiconductor conference in Japan in December 2012, and “serious talks” began in March, Higashi said.
The acquisition of Tokyo Electron makes future deals between large U.S. or European companies and their Japanese counterparts “far less far-fetched” than before, Macquarie Group Ltd. analysts Damian Thong and Claudio Aritomi said in a report.
“The surprising merger between Tokyo Electron and Applied Materials raises the tantalizing prospect of more cross-border M&A with Japanese firms as targets,” they said in the report.
Before running Varian, Dickerson worked at KLA-Tencor Corp. (KLAC:US), the Milpitas, California-based chipmaking equipment manufacturer, from 1986 to 2004. He was in charge of the company’s day-to-day operations as chief operating officer from 1999 and as president from 2002. He resigned in April 2004, saying he wanted to look for a CEO job at another company as the position at KLA wasn’t “in sight.” Varian named him CEO six months later.
The acquisition of Tokyo Electron also brings together two companies that are globalized and both number one in their respective regions, said Rubenstein of Advanced Research.
“Both sides know what they’re getting into,” he said. “There will be culture clashes, but these guys are a lot alike despite being from two sides of the Pacific.”
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