Traders are wagering that a lengthy antitrust review won’t stop Applied Materials Inc. (AMAT:US) from completing a $9.39 billion deal to help the world’s No. 1 supplier of chipmaking equipment boost its market share.
Applied Materials agreed last week to an all-stock purchase of Tokyo Electron Ltd. (8035), the third-biggest manufacturer, pushing their combined market share to at least 25 percent. Tokyo Electron has also said the new company will seek more deals to add share. While Tokyo Electron has fallen five straight days on traders’ concerns about regulatory approval and how long it will take to close the deal, both stocks are still up at least 6 percent since the combination was announced, according to data compiled by Bloomberg.
The companies estimate the transaction will be completed by the second half of 2014, after they win clearance from regulators in the U.S., China and Japan. While Argus Research Co. says there’s at least a 40 percent chance the takeover will be blocked or delayed, UBS AG estimates the two companies’ top three products are different, which should help ease antitrust concerns.
“They won’t be dominating any of these existing markets to the point where I think it’s going to be much of a hurdle,” Angelo Zino, an equity analyst at S&P Capital IQ in New York, said in a phone interview. “In my view, the deal gets done, but it’s definitely going to be a long process.”
Taking into account Tokyo Electron’s $2.5 billion in net cash, the total value of the deal is less than $7 billion, which still makes it the largest foreign takeover of a Japanese company in six years, according to data compiled by Bloomberg.
“At this point, we plan to close the consolidation in the latter half of 2014 after the approvals by authorities and shareholders,” Tatsuya Aso, a spokesman for Tokyo Electron, said in an e-mail yesterday. “No change has been made after the announcement.”
Kevin Winston, a spokesman for Applied Materials, declined to comment.
Tokyo Electron shareholders will get 3.25 shares of the new entity for each share they hold in the Tokyo-based supplier. Applied Materials shareholders will get one share for each share they own, leaving investors in the Santa Clara, California-based company controlling about 68 percent of the merged entity.
Today, Applied Materials shares fell 0.5 percent to $17.42 at 10:04 a.m. New York time
Tokyo Electron, after declining for five days, rose 1.4 percent today to 5,240 yen. That’s still about 5 percent below the current value of the all-stock bid, data compiled by Bloomberg show.
The spread indicates there’s some concern among traders that regulators could drag out the review process and ask for divestitures or other concessions, according to Peter Drippe, a New York-based portfolio manager who runs merger arbitrage at Visium Asset Management LP.
“Expectations are that it won’t get blocked,” Drippe said in a phone interview. “There are a lot of markets to look at in terms of what these guys do, and it’s very detail-oriented so it could certainly get a pretty long-term review.”
While it’s rare for regulators to completely halt mergers, there’s still a chance this deal may be rejected, said James Kelleher, a New York-based analyst at Argus Research.
“This quite simply would give Applied Materials a very big market share in semiconductor fabrication, and some may feel that’s insurmountable,” he said in a phone interview. “There are a lot of places where this deal could stumble.”
Osamu Tanabe, director of the mergers and acquisitions division at Japan’s Fair Trade Commission, declined to comment on the approval process. Two phone calls to the Ministry of Commerce Anti-Monopoly Bureau went unanswered during a public holiday in China.
Gina Talamona, a spokeswoman for the U.S. Department of Justice, declined to comment. Representatives at the U.S. Federal Trade Commission couldn’t be reached during a government shutdown. The FTC’s website said the agency was closed.
Applied Materials is the biggest chip-manufacturing equipment supplier, bringing in 14.4 percent of industry revenue last year, according to research firm Gartner Inc. Tokyo Electron’s 11.1 percent market share ranked third, after ASML Holding NV. (ASML)
Tokyo Electron President Tetsuro Higashi, who will become chairman of the new company, said in an Oct. 1 interview that the combined entity will seek more deals after the merger.
Regulators will review whether Applied Materials and Tokyo Electron compete in the same areas, how concentrated those markets are, and how easily customers can switch products in response to price increases, said Daniel Crane, an antitrust lawyer and a professor of law at the University of Michigan.
The primary products where the companies overlap are etch, the technique of removing material from the surface of silicon wafers, and deposition, the process of putting layers of metals and non-metals on disks of silicon during the creation of chips, according to Timothy Arcuri, a San Francisco-based analyst at Cowen Group Inc. Etch consists of two separate markets --silicon etch, which is dominated by Lam Research Corp., and dielectric etch, where Applied Materials has lost “tremendous” market share, he said in an e-mail.
“In neither of these markets would the competitive balance of power shift,” Arcuri said.
Intel Corp. (INTC:US), Taiwan Semiconductor Manufacturing Co. (2330) and Samsung Electronics Co. now buy the majority of the production machines deployed by the equipment industry, and antitrust agencies typically analyze how customers are affected by a merger.
“The trend for consolidation in the semiconductor industry has been going on for a while for our suppliers and customers, as well,” Elizabeth Sun, a spokeswoman for Hsinchu, Taiwan-based TSMC, said in a phone interview. “If TSMC suppliers’ consolidation can create synergistic benefits, it’s a good thing, as R&D costs are rising.”
Chuck Mulloy, a spokesman for Santa Clara-based Intel, and Nam Ki Yung, a spokesman for Suwon, South Korea-based Samsung, declined to comment.
Applied Materials and Tokyo Electron said they would give up as much as $600 million in revenue by divesting businesses or making other concessions in order to win regulatory clearance, according to their agreement.
“That suggests to me that they’ve done the work to figure out what kind of leeway they need,” Don D’Amico, a special situations analyst at Oscar Gruss & Son Inc. in New York, said in a phone interview. “The overarching issue here is, how much time? Not will it happen, but when?”
The deal became a “source of some frustration” to merger arbitragers because the American depositary receipts of Tokyo Electron aren’t liquid enough to make bets on the transaction’s timing or completion odds, according to a research note last week from Keith Moore, an event-driven strategist at Stamford, Connecticut-based MKM Partners LLC. The primary shares of the two companies trade in different time zones in New York and Tokyo.
The market is already projecting that regulatory clearance won’t be a major problem, according to Mehdi Hosseini, an analyst at Susquehanna Financial Group LLP in San Francisco. Tokyo Electron shares have risen 6.6 percent since the deal was announced, and Applied Materials is up 9.5 percent (AMAT:US).
While there isn’t enough product overlap between the two companies to prompt regulators to block the deal, the approval process may take much longer than some investors expect, said Jagadish Iyer, a Piper Jaffray Cos. analyst in New York.
“Could this get pushed out even later than late 2014? Definitely,” said S&P Capital IQ’s Zino. “I’d say that’s the biggest concern right now.”
To contact the reporter on this story: Will Robinson in New York at email@example.com
To contact the editor responsible for this story: Sarah Rabil at firstname.lastname@example.org