Lam Research Corp (LRCX.O), a supplier of wafer fabrication equipment, agreed to buy smaller rival Novellus Systems Inc (NVLS.O) for $3.3 billion in stock as it looks to gain cutting-edge technology and become more efficient.
The deal is the latest acquisition in the semiconductor industry as manufacturers and chip-gear makers wrestle with cutthroat competition, waning PC sales growth and a weak economy.
Under agreement's terms, Novellus stockholders will receive 1.125 shares of Lam Research common stock for each Novellus share held, or a 28 percent premium to the stock's close on Wednesday on Nasdaq.
"If you look at the current environment, there's lots of uncertainty. If anything this deal comes at a good time because it's at an inflection point for the next upturn," said Stifel Nicolaus analyst Patrick Ho.
Ho said that at 2.3 times 12-month sales, Lam is paying a reasonable price for Novellus and much less than the 4.5 times that leading chip-gear maker Applied Materials paid for Variant earlier this year.
Lam's leadership in etch and single-wafer clean equipment aligns with Novellus' specialization in thin-film deposition and surface preparation technologies, the two companies said in a statement.
The combined company will be well-positioned to lead the industry through critical technology transitions including 3D structures in advanced logic and NAND memory as well as the scaling to 450 millimeter wafers, they said.
Lam's acquisition of Novellus, which analysts for years have speculated could happen due to their complementary businesses, comes during a tough moment in the chip gear industry.
Chip manufacturers worried about weak economies in the United States and Europe and sluggish sales of personal computers have canceled and cut orders for new equipment.
Global wafer fabrication equipment spending will slump 23 percent next year to $27 billion after growing 10 percent in 2011, market research firm Gartner said on Wednesday.
In May, leading chip-gear maker Applied Materials bought Varian Semiconductor Equipment Associates for $4.9 billion in its largest acquisition ever, shoring up capacity and gain additional technology.
No. 3 chipmaker Texas Instruments TXN.N bought National Semiconductor for $6.5 billion earlier this year.
Lam Research expects the deal to accelerate its revenue and profit growth. It expects the deal to generate cost savings of about $100 million per year from the fourth quarter of 2013.
The acquisition is expected to add to Lam's earnings within one year of the deal's closure, expected in the second quarter of 2012.
"In terms of how the two companies come together, I think it's pretty positive," said Needham analyst Edwin Mok. "It just makes sense to be a bigger company in the (semiconductor equipment) space right now."
Lam and Novellus stockholders will own about 59 percent and 41 percent of the combined company, respectively.
Fremont, California-based Lam said Chief Operating Officer Martin Anstice will assume the position of CEO of Lam Research from Steve Newberry effective January 1, 2012.
Lam also announced a $1.6 billion common stock repurchase program.
Shares of Lam Research, which closed at $39.48 on the Nasdaq, were down 4 percent in extended trade. Novellus shares were up 20 percent.
(Reporting by Himank Sharma in Bangalore, Noel Randewich in San Francisco; Editing by Unnikrishnan Nair, Phil Berlowitz)