* Applied Materials shareholders to hold 68 pct of company
* Applied CEO to lead new company
* Applied shares rise 9 pct, Tokyo Electron jumps 13 pct
By Reiji Murai and Supantha Mukherjee
Sept 25 Applied Materials Inc agreed to
buy rival Tokyo Electron Ltd in an all-stock deal worth
more than $10 billion, combining the No.1 and No.3 makers of
chip-making gear as demand for their products slows and it gets
tougher to turn a profit.
The deal, which analysts expect to hold up under scrutiny
from antitrust regulators, aims to create a new company with a
shared leadership team that is 68 percent owned by Applied
Materials shareholders, the companies said on Tuesday.
The value of the deal is worth $10.16 billion, based on
Tokyo Electron's issued shares, Applied Materials' latest stock
price, and the agreed upon stock ratio, making it the
second-largest acquisition by a foreign buyer in Japan,
according to Thomson Reuters data.
Applied Materials shares finished 9 percent higher on the
Nasdaq on Tuesday at $17.45. Tokyo Electron's shares surged 13.2
percent on Wednesday to 5,490 yen.
Applied, Tokyo Electron and Dutch chip equipment maker ASML
Holding NV are the three largest players in an
industry that has consolidated as the rising cost of developing
cutting-edge chips and slowing semiconductor demand forced
alliances and acquisitions.
The combined market value of Applied and Tokyo Electron at
the time of the announcement was around $29 billion.
Most U.S. chipmakers have sold off or mothballed capacity
and outsourced manufacturing to Asian foundries such as Taiwan
Semiconductor Manufacturing Co Ltd, further eroding
Applied's customer base.
The American company's net income has fallen steadily over
the past two years and it posted losses in two quarters during
that period. Tokyo Electron reported a 23 percent drop in
quarterly sales in July.
ASML bought U.S.-based Cymer last year for about $2.5
billion, while Lam Research Corp bought smaller rival
Novellus Systems Inc for $3.3 billion.
"When you look at the buyers of semiconductor equipment;
when you look at the people who are really making very advanced
chips these days, it's a very small number," Mike Splinter,
Applied Materials' executive chairman, told Reuters. "Technology
changes are getting more difficult and complex."
Despite their global reach and scale, few of their products
overlap, analysts said.
RBC analyst Mahesh Sanganeria said both companies sell
etching equipment, used to carve circuits onto silicon, but
Applied Materials is a relatively small player in that market
compared with rival Lam Research.
"There isn't that much overlap at the product level. I think
it will be looked at closely, but I think it will go through,"
Close competitors of the new company would include Lam
Research, KLA-Tencor Corp and Hitachi Ltd
subsidiaries Hitachi High-Technologies Corp and Hitachi
Kokusai Electric Inc.
"We've looked at this in a lot of detail and we think the
overlaps are very, very small," Splinter said.
Citigroup paid $12.56 billion in two tranches for
Japanese bank Nikko Cordial in 2007, which remains the largest
ever foreign acquisition in the country, Thomson Reuters data
NEXT BIG WAVE
Should the acquisition win the OK of regulators, the
combined company might be able to ride the next big wave of
capital investment from chipmakers.
Intel Corp, Samsung Electronics Co Ltd
and TSMC are planning a new generation of mega-factories - a
major shift that will require tens of billions of dollars.
Within a decade, there could be just a handful of plants around
the world producing the most cutting-edge microchips.
"Applied Materials is going to be the biggest beneficiary
from this deal, given that they're going to be a large company
and I think their customer exposure also improves following this
deal," Stifel Nicolaus & Co analyst Patrick Ho said.
The deal is the biggest ever for Applied Materials, whose
last big acquisition was Varian Semiconductor Equipment
Associates for $4.9 billion in 2011. The companies expect the
deal to close in the middle to the second half of next year.
For every existing share, Tokyo Electron shareholders will
receive 3.25 shares of the as-yet unnamed new company and
Applied Materials shareholders will receive 1 share.
Applied Materials CEO Gary Dickerson will be chief executive
of the new company and Tokyo Electron Chief Executive Tetsuro
Higashi will become chairman. The companies will maintain dual
listings on Nasdaq and the Tokyo Stock Exchange.
Dickerson told analysts he would move to Japan to lead a
company whose board will comprise 11 directors - five appointed
by each company and another they both agree upon.
The companies said they expected to achieve $250 million of
savings by the end of the first fiscal year of operation. The
new company will also buy back $3 billion of its shares within
12 months of the combination, they said.
Goldman, Sachs and Co acted as Applied Materials' financial
adviser, while Tokyo Electron was advised by Mitsubishi UFJ
Morgan Stanley Securities Co.
Jones Day and Nishimura & Asahi represented Tokyo Electron.
Weil, Gotshal & Manges LLP, Mori Hamada & Matsumoto, and De
Brauw Blackstone Westbroek advised Applied Materials.
"They have the highest profit margins, they have the best
balance sheets, they make money through thick and thin," said
David Rubenstein, senior analyst at Advanced Research Japan. "So
they are not desperate, but they are hungry for earnings growth
and this is one way they can do it."