Applied Materials to buy Varian Semi for $4.9 billion

SAN FRANCISCO/BANGALORE Wed May 4, 2011 6:54pm EDT

SAN FRANCISCO/BANGALORE (Reuters) - Applied Materials (AMAT.O) will buy Varian Semiconductor Equipment Associates Inc VSEA.O for $4.9 billion, shoring up its lead in the $35 billion global market for chip-making gear while tapping rising demand from smartphone and solar equipment manufacturers.

The world's largest maker of equipment for semiconductor manufacturing will pay a 55 percent premium to Varian's Tuesday closing price to gain control of a small but fast-growing niche market that is pivotal in chipmaking and in which Varian is the dominant technology leader.

Varian's stock jumped 51 percent to close at $61.36 after the $63-per-share deal was announced on Wednesday.

Buying Varian will boost Applied Materials' earnings per share within a year and save up to $60 million annually as the red-hot market for gadgets like Apple's (AAPL.O) iPhone fuels demand for chip manufacturing tools, executives said.

Varian produces ion implantation gear for making integrated circuits, or chips, found in all modern electronic gadgets. It is a complex process of implanting ions around which the structure of the chip is built.

Applied Materials does not currently offer ion implanters, a small but fast-growing part of the global chip-making gear market that will become increasingly crucial as microchip architecture becomes tinier and more complex.

"Varian has been very successful as a company just because of their large market share," said Needham & Company analyst Edwin Mok. "There are plenty of things and cross-selling opportunities they can leverage off each other -- which sort of justifies the price."

Spending on ion implanters accounts for up to 5 percent of the $35 billion wafer fabrication equipment market, said Caris & Co analyst Ben Pang.

The Varian deal comes a month after Texas Instruments TXN.N announced it would acquire National Semiconductor (NSM.N) for $6.5 billion, a 78 percent premium. That agreement would unite two of the industry's oldest companies into a dominant force in analog microchips used in products ranging from phones to cars.

It is Applied Material's largest ever acquisition and will help the company corner a larger share of the equipment market for higher-performance chips, particularly for mobile applications with faster speeds and longer battery life.

Varian's technology could also extend into solar, display and light-emitting diodes, or LEDs, the companies said.

But at about 16 times expected earnings, compared to around 10 times expected earnings of other chip tool makers, the Varian acquisition seems expensive, said RBC Capital analyst Mahesh Sanganeria.

"The case of National Semiconductor was different. The stock was undervalued. I don't think Varian's stock was undervalued by any stretch," Sanganeria said.

Shares of Novellus Systems NVLS.O, another chip-gear maker, jumped 6.5 percent to $32.92 as investors speculated that competitors plump with cash after cutting costs during the recession could make more acquisitions.

"Their business models are working pretty well right now, so what do you do with the cash? Maybe you buy back shares, or you can go out and try to buy a company that will offer you some opportunities to expand your market," said Pacific Crest Securities analyst Weston Twigg.

He pointed to Nanometrics (NANO.O), GT Solar SOLR.O, Rudolph Technologies RTEC.O and Cymer CYMI.O as potential targets.

Varian, whose customers include GlobalFoundries, Hynix Semiconductor (000660.KS), Intel (INTC.O), IBM (IBM.N), Micron Technology (MU.O) and Samsung Electronics (005930.KS), entered the market for ion implanters in 1975 through the acquisition of Extrion Corp.

Also on Wednesday, Intel (INTC.O) Corp previewed its next generation manufacturing technology, giving shares of chip equipment makers support on expectations of more capital spending.

BOOSTER DEAL

Applied Materials sees the Varian purchase adding more than 8 percent to its earnings per share before special items in the first full year.

The company estimates savings from the acquisition at $50 million to $60 million annually, mostly from costs of materials, executives told analysts on a conference call.

"We have a very strong and established global supply chain, and we think there's going to be value that comes out of leveraging that," Applied Materials Chief Financial Officer George Davis said.

The combined company would compete with ASML Holding N.V. (ASML.AS), Tokyo Electron Limited (8035.T), KLA Tencor Corporation (KLAC.O) and Lam Research Corp (LRCX.O).

Applied Materials expects the deal to be reviewed simultaneously by regulators in the United States and other countries but analysts were not concerned about antitrust issues.

Applied expects to fund the deal with cash on hand and debt. It has secured a commitment for $2 billion, one-year bridge loan from JPMorgan Chase Bank (JPM.N), Citigroup Global Markets Inc (C.N) and Morgan Stanley Senior Funding Inc (MS.N).

Credit Suisse (CSGN.VX) acted as financial adviser to Varian.

Varian will have to pay a termination fee of $147 million if it ends the deal, and if agreement fails to get antitrust approvals, Applied will have to pay $200 million, the companies said.

Applied Materials' stock ended 1 percent lower at $15.09.

(Reporting by Himank Sharma and Saqib Iqbal Ahmed in Bangalore, Noel Randewich in San Francisco; editing by Gunna Dickson and Tim Dobbyn)

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