Applied Materials' Semitool Acquisition: The Best Deal It Ever Made

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Includes: AMAT, AMD, ANAT, ASML, CAJ, MU, SMTL
by: Robert Castellano

Over the past dozen years I have been critical of Applied Materials' (Nasdaq:AMAT) acquisition and new product strategies. In my humble opinion, and I have been analyzing the semiconductor equipment space since 1985, the worst was the acquisition of Etec in 2000, a manufacturer of electron beam systems for photomask manufacturing for a whopping $1.7 billion. Applied dropped out of the electron beam market a few years later when they couldn’t get the system to work as a direct write lithography tool to manufacture semiconductors and compete with ASML (Nasdaq:ASML), Canon (NYSE:CAJ), and Nikon. Whereas Etec led the lucrative $300 million mask making business with a 30% market share in 2001, Applied dropped out of that market as well.

In 1999, Applied had more than double revenues of its closest competitor Tokyo Electron. In 2008, the company was only 35% ahead of number 2 player ASML .

1979

1989

1999

2008

Company

Sales ($M)

Company

Sales ($M)

Company

Sales ($M)

Company

Sales ($M)

Fairchild Test Systems

$111

Tokyo Electron

$634

Applied Materials

$5,457

Applied Materials

5878

Perkin-Elmer

$101

Nikon

$582

Tokyo Electron

$2,634

ASM Lithography

4367

Applied Materials

$54

Applied Materials

$523

Nikon

$1,430

Tokyo Electron

4343

GCA

$54

Advantest

$399

ASM Lithography

$1,276

KLA-Tencor

2112

Teradyne

$53

Canon

$384

Teradyne

$1,213

Lam Research

1904

Varian

$51

General Signal

$354

KLA-Tencor

$1,049

Nikon

1742

Tektronix

$39

Varian

$335

Advantest

$955

Canon

1090

Eaton

$38

Hitachi

$210

Lam Research

$894

Hitachi High-Tech

1056

Kulicke & Soffa

$37

Teradyne

$200

Canon

$751

Dainippon Screen.

1041

Balzers

$33

ASM

$187

Hitachi

$743

Novellus Systems

970

Click to enlarge

In 2002, Applied’s revenues gave the company a 48% share of the overall semiconductor equipment market and a 50% share in 9 of the 17 sectors in which it competed. In 2008, Applied’s overall market share eroded to 38% of the overall equipment market, although it maintained a market share greater than 50% in 7 of the 16 sectors in which it competed.

Last week Applied Materials announced its purchase of Semitool (Naadaq:SMTL) and in my opinion the best deal Applied ever made. Semitool is a company that competed strongly in copper interconnect market. In December 1995 it recognized the first sale of its copper electrodeposition (ECD) tool and owned the market through 1999 until Novellus (Nasdaq:NVLS), Applied materials, EJA, Ebara, and CuTek saw an opportunity to compete. Semitool maintained a leadership role partly because its tools were selling for $1.7 million in 1999 compared to $3 million for one sold by Novellus.

In 2008, according to my statistics, Novellus had $92 million in ECD sales, Semitool $21 million, and Applied Materials $3 million. For 2009 Semitool is gaining share with customers AMD (NYSE:AMD)/GlobalFoundries and Micron (NYSE:MU)/Nanya/Inotera.

The real money maker for Applied’s acquisition is Semitool’s emphasis and leadership roles in the back-end packaging market. The market for wafer level processing (WLP) will be huge, growing from 6 billion ICs in 2009 to 16 billion in 2013. According to the CFO of aa private company I spoke with that sells competing equipment to Semitool in this space, his business is currently undergoing “hypergrowth”.

But the really big show comes in 3-D wafer packaging using a technology called through silicon via (TSV). In a recent analysis I wrote in a report “3-D TSV: Insight On Critical Issues And Market Analyses,” (check my website). The overall equipment for TSV manufacturing will grow from under $200 million in 2009 to over $1.2 billion in 2013. Semitool is a key player in the TSV industry and has tools at 17 of its top 18 customers.

Partnerships, acquisitions, and membership in 3-D consortia point to Applied Materials' new strategy of dominance in the semiconductor back-end business.

Disclosure: I have no positions in any of these companies