Applied Inches Closer To Merging With Tokyo Electron

Jun.30.14 | About: Applied Materials, (AMAT)

Summary

Applied Materials’ stockholders approved its merger with Tokyo Electron, earlier this week.

Applied expects the transaction to close in the second half of the year, subject to customary conditions, including regulatory reviews in various countries.

With an estimated value of $29 billion, the combined entity aims to become a global innovator in semiconductor and display manufacturing technology.

Applied Materials’ (NASDAQ:AMAT) stockholders approved its merger with Tokyo Electron, earlier this week. Approximately 99 percent of the shares voting were in favor of adopting the company’s business agreement with Tokyo Electron. Applied announced its merger with Tokyo Electron in an all-stock deal valued at more than $7 billion in September last year. Applied expects the transaction to close in the second half of the year, subject to customary conditions, including regulatory reviews in various countries.

As per the definitive agreement signed by the two companies, Tokyo Electron shareholders will receive 3.25 shares of the new entity for every Tokyo Electron share held and Applied’s shareholders will receive one share for every Applied Materials share held. After the close, Applied Materials and Tokyo Electron shareholders will own approximately 68% and 32% of the new company, respectively.

Both companies supply equipment used to manufacture semiconductors, flat-panel displays and solar photovoltaic products. U.S. based Applied Materials is the world’s largest maker of semiconductor equipment by sales followed by ASML Holding NV (NASDAQ:ASML) and Tokyo Electron. With an estimated value of $29 billion, the combined entity aims to become a global innovator in semiconductor and display manufacturing technology.

Our price estimate of $19 for Applied Materials is at an approximate 15% discount to the current market price.

How Applied Can Benefit From The Merger

Higher wafer fab equipment (WFE) share: The combined WFE share of Applied and Tokyo Electron is estimated at 34%. Though the WFE market declined by 8% in 2013, research firm Gartner believes the market will grow 13% and 11% in 2014 and 2015, respectively. In calendar year 2013, Applied gained 1.4 points of wafer fab equipment market share, ending the year at its highest level since 2006.

Shared R&D Costs: The ongoing mobility trend is driving fundamental technology changes in the industry, which have become more difficult and complex over time. Merging its R&D capabilities with Tokyo Electron and bringing together complementary technologies will enable Applied to create an expanded set of capabilities and increase its opportunity to enable major future technology inflections and advance customers’ roadmaps in both semiconductor and display markets.

Broader Product Portfolio: Featuring among the three largest chip equipment firms, Applied and Tokyo Electron have fairly broad product portfolios. Although they have some overlapping products, their businesses target different sub-segments of the industry. The two companies believe they will gain by leveraging each other’s expertise and technological prowess. By pooling knowledge and expertise, both companies stand to improve their technological advantage.

Lower cost of developing chips: The semiconductor industry is consolidating due to rising costs of developing cutting-edge chips. This had led to fewer manufacturers buying capital equipment sold by Applied Materials and its competitors. ASML Holding NV bought U.S.-based Cymer last year for about $2.5 billion, while Lam Research Corp. (NASDAQ:LRCX) bought smaller rival Novellus Systems Inc. for $3.3 billion. The combined expertise of Applied Materials and Tokyo Electron will help the new company tackle rising costs of developing cutting-edge chips and slowing semiconductor demand.

Disclosure: No positions