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CORRECTED - UPDATE 6-Applied Materials to buy Varian Semi for $4.9 bln
May 4, 2011 / 10:38 AM / 6 years ago

CORRECTED - UPDATE 6-Applied Materials to buy Varian Semi for $4.9 bln

(Corrects to remove erroneous chart)

* To pay $63/shr; offer at 55 pct premium

* Deal to add to Applied earnings in first year

* Eyes surging demand from smartphones, solar companies

* Varian shares up 51 percent; Applied down 1.8 percent (Adds analysts’ comments, background on industry)

By Noel Randewich and Himank Sharma

SAN FRANCISCO/BANGALORE, May 4 (Reuters) - Chip tool maker Applied Materials (AMAT.O) will buy Varian Semiconductor Equipment Associates Inc VSEA.O for $4.9 billion in cash as it looks to meet rising demand from smartphone and solar equipment manufacturers.

The deal values Varian at $63 per share, a 55 percent premium to its closing price on Tuesday. The company’s stock jumped 51 percent to $61.25 in morning trading on Wednesday, while Applied Materials shares dipped less than 1 percent.

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 niche of the global chip-making gear market that will become increasingly crucial as microchip architecture becomes more microscopic and complex.

“Varian’s presence in solar equipment outside of the semiconductor space should be a good fit for Applied Materials,” said Caris & Co analyst Ben Pang. “They paid for the company that has the right technology to be the market leaders for a number of years.”

Spending on ion implanters accounts for up to 5 percent of the $35 billion wafer fab equipment market, Pang said.

The Varian deal comes a month after Texas Instruments’ TXN.N announcement to acquire National Semiconductor (NSM.N) for $6.5 billion, a 78 percent premium. The 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. [ID:nN04281619]

Wednesday’s deal, Applied’s largest ever, will help the company corner a larger share of the fabrication market as a provider of technology for the makers of higher-performance chips, particularly for mobile applications with faster speeds and longer battery life.

Varian’s technology could also extend into such markets as 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, were up 4.17 percent at $32.20.

Intel, the world’s leading chipmaker, has scheduled an announcement later on Wednesday, expected to relate to its new 22-nanometer production process due to start in November.

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.

Buying it gives Applied Materials access to a potential $1.5 billion market, executives said.

“(Ion) implants should grow a little faster than overall chip equipment. We are seeing increased complexity in the structure of transistors and I think as Intel unveils their new 22 nm transistors ... you’ll see Varian getting increased ion opportunity as the transistor becomes more complicated,” said Barclays Capital analyst C.J. Muse.

BOOSTER DEAL

Applied Materials expects the Varian purchase to add 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 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.

Shares of Applied Materials were down 2.2 percent at $14.91.

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

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