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Just before Lam Research (LRCX) announced its acquisition of Novellus (NVLS), I posted an article providing arguments why Lam Research seemed undervalued at $41 per share. In this short article, I analyse the nature of the deal with Novellus and make the argument that the company is still undervalued after the deal, especially at $37 per share.

Reminder of the terms of the deal (source: LRCX investor relations):

"Under the terms of the agreement, Novellus stockholders will receive 1.125 shares of Lam Research common stock for each share of Novellus that they own, in a tax-free exchange. Based on the closing price of Lam's stock on December 14, 2011, the transaction values Novellus at a price of $44.42 per common share. Upon closing, Lam and Novellus stockholders will own approximately 59 percent and 41 percent, respectively, of the combined company."

Let's see what these terms mean for the valuation of LRCX before and after the deal:

Number of shares LRCX (in M, incl. stock options)
Before the deal new for transaction Total after the deal
122.7 84.9 (=76*1.125) 209.8IN
Fundamentals before and after transaction

LRCX NVLS Total Total

per share

Earnings ($M) 724 262 986 4,71
Cash Flows ($M) 881 336 1217 5,81
Cash ($M) 2149 671 2820 13,47

At $37 per share, and excluding the cash per share of $13.47 the trailing PER of LRCX after the transaction is 4.99 and the price to cash flows from operations is 4.04.

Still fairly cheap given the strategic benefits of the acquisition: after the deal, LRCX will be a supplier of Intel (INTC), it will have a much broader product range and will be in a much better position to compete with Applied Materials (AMAT), ASML (ASML) and Aixtron (AIXG).

Strong buy !

Source: Lam Research: Still Undervalued After Novellus Deal