Lam Research's Next Acquisition Opportunity

| About: Lam Research (LRCX)

Summary

Following the breakdown in the Lam Research - KLA-Tencor merger, Lam has $5 billion in cash that can be used for future mergers or acquisitions.

Hitachi Kokusai announced it was exiting its semiconductor equipment business by selling Hitachi Kokusai.

Hitachi Kokusai is a market leader in thin film deposition equipment, which will compliment Lam Research's line of equipment.

Following the breakdown in the Lam Research LRCX) - KLA-Tencor (NASDAQ:KLAC) merger agreement, another opportunity has presented itself and in my opinion is a good fit for LRCX.

Hitachi Ltd. announced in early October 2016 that it was planning on exiting the semiconductor equipment market.

"there are plans to sell Hitachi Kokusai's chipmaking equipment business next year. Hitachi could first buy all of Hitachi Kokusai's remaining shares on the market via a tender offer, then spin off the chipmaking equipment business. Hitachi could also directly sell a portion of its stake in the unit to another company."

Hitachi Kokusai is a market leader in deposition equipment that compliments LRCX as a result of its $3.3 billion acquisition of Novellus in mid 2012. I already discussed the benefits of that acquisition in a May 2, 2012, Seeking Alpha article entitled "Can Novellus Reinvigorate Lam Research?"

According to Kokusai Electric's annual report:

"The vertical furnace is our core product and this can deposit films on multiple wafers at once. This can provide high functional films and conformal films for three-dimensional structures at a low cost. However, we are pushing development of technology with the aim of shortening the processing time, enhancing particle performance and improving thickness uniformity. Moreover, with regards to single wafer tool, we are promoting developing various treatment technologies that can improve films quality at low temperature using our unique activation technologies such as plasma."

The company's semiconductor manufacturing systems are:

  • Batch thermal process system
  • Batch High Temperature Anneal Processing System
  • Batch SiGe/Si Epitaxial Growth System
  • Single Wafer Plasma Nitridation / Oxidation System
  • Single Wafer Plasma Dry Strip System

Company revenues and market share

So let's take a look at what Hitachi Kokusai has to offer. According to The Information Network's report "Global Semiconductor Equipment: Markets, Market Shares, Market Forecasts," in the 2015 Tube LPCVD market, Hitachi Kokusai led on revenues of $505 million representing a 53.2% share, as shown in the Table below. The company gained share from 2014 over Tokyo Electron, the company that was to be acquired by Applied Materials (NASDAQ:AMAT), which was called off in April 2015.

Tube LPCVD ($M)

2014 Rev.

Share

2015 Rev.

Share

Hitachi Kokusai Electric

479

50.6%

505

53.2%

Tokyo Electron

439

46.4%

416

43.9%

ASM International (OTCQX:ASMIY)

24

2.5%

27

2.9%

Total Market

946

100.0%

948

100.0%

Source: The Information Network

Click to enlarge

How does Hitachi Kokusai's semiconductor equipment benefit Lam Research? In the total deposition market of $6,977 million, of which Tube LPCVD revenues of $948 million represent 13.5% of the market, Hitachi Kokusai ranked 5th with a share of 7.2% (see table below). The acquisition of Hitachi Kokusai would have given Lam Research a market share of 22.7% in 2015, still below AMAT's share of 41.1%. Note, however, that in 2015 LRCX gained market share against AMAT, and if the trend of market share gain for LRCX and Hitachi Kokusai continues into 2016, the differential between AMAT and LRCX would be even less.

Total Deposition ($M)

2014 Rev.

Share

2015 Rev.

Share

Applied Materials

3,235

45.5%

2,868

41.1%

Lam Research

948

13.3%

1,080

15.5%

Tokyo Electron

884

12.4%

982

14.1%

ASM International

529

7.4%

549

7.9%

Hitachi Kokusai Electric

479

6.7%

505

7.2%

Total

7,112

100.0%

6,977

100.0%

Source: The Information Network

Click to enlarge

Hitachi Kokusai actually had semiconductor revenues $634 million in 2015, up from $599 million in 2014, competing in other sectors such as RTP, Plasma Modification and Oxidation/Diffusion. Hitachi Kokusai led the Oxidation/Diffusion Furnace market in 2015, generating revenues of $104 million and a 43.1% share of the $241 million global market. In 2015, Hitachi Kokusai vaulted ahead of Tokyo Electron.

Oxidation/Diffusion Furnaces ($M)

2014 Rev.

Share

2015 Rev.

Share

Hitachi Kokusai Electric

81

32.6%

104

43.1%

Tokyo Electron

117

47.3%

91

37.9%

ASM International

28

11.4%

33

13.8%

Others

12

4.7%

13

5.2%

Total

248

100.0%

241

100.0%

Source: The Information Network

Click to enlarge

The acquisition of Hitachi Kokusai by LRCX would add to the latter's semiconductor business markets, complimenting its deposition product line and adding another. Although Oxidation/Diffusion processes are important for ICs, Ion Implantation has become the preferred method of doping. Although the market is about 50% of what it was 10 years ago, the controlled diffusion of dopants into silicon to alter the type and level of conductivity of semiconductor materials is the foundation of forming a p-n junction and formation of devices during wafer fabrication.

What about Hitachi High Technologies?

The release from Hitachi Ltd. makes no mention of Hitachi High Technologies. This company is the crown jewels of Hitachi Ltd's semiconductor equipment endeavors. As shown below, it is the No. 3 company in the process control market, dominated by KLA-Tencor.

2015 Rev.

Share

KLA-Tencor

2,028

49.9%

Applied Materials

493

12.1%

Hitachi High-Technologies

421

10.4%

Total

4,060

100.0%

Source: The Information Network

Click to enlarge

If Hitachi High-Technologies is part of negotiations, LRCX could get back into the metrology/inspection market it could not with KLAC.

In addition to the process control sector, Hitachi High Technologies is in the No. 4 position in the Dry Etch market behind LRCX, TEL and AMAT. Any acquisition of Hitachi High Technologies by LRCX would cement the company's dominance in the Dry Etch market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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