There have been rumors of the purchase of Novellus (NVLS) by Lam Research (LRCX) practically since I started The Information Network in 1995. It finally happened, but it begs the question - Why now? Why not years ago?
With Lam Research being the purchaser and roughly twice as big as Novellus, one can assume that it was a help to Novellus because the transaction values Novellus at $44.42 a share, representing a 28 percent premium over Novellus's closing stock price before the deal was announced, whereas Lam is paying a smaller premium than the average paid by buyers of semiconductor-equipment makers in recent years. In deals valued at more than $250 million during the past five years, acquirers have paid an average premium of 56 percent according to Bloomberg data.
In other words, the acquisition makes it appear that Novellus was desperate to sell.
However, if we look at 2011, Lam Research lost share in its bread-and-butter etch business to TEL (Tokyo Electron Limited) and Hitachi High Technologies, while Novellus lost share in Physical Vapor Deposition (PVD) to Ulvac and lost Chemical Vapor Deposition (CVD) share to Applied Materials (AMAT) and ASM (ASMI).
In addition, if we look at financials, LAM Research's net income dropped from $182.2 million in CY Q1 2011 to a less-than respectable $33.2 million in Q4 2011.
Novellus' net income dropped by less than a third, from $96.4 million in CY Q1 2011 to $38.5 million in Q4.
This past week, Lam reported sales of $658.96 million for the quarter ended March 25, up 13 percent from the prior quarter but down 19 percent compared to the year-ago quarter. Lam reported a net income, up 30 percent compared to the previous quarter but down 75 percent compared to the year ago quarter.
Novellus reported first quarter sales of $326.7 million, up 16 percent from the previous quarter but down 21 percent compared to the first quarter of 2011. Novellus reported a first quarter net income of $44.4 million, or 59 cents per share, up 15 percent from the previous quarter and down 54 percent from the first quarter of 2011.
In other words, while it looks like Novellus was desperate to sell, Lam Research was desperate to buy.
So, why does this all matter? We forecast that the semiconductor equipment market will drop as much as 10% in 2012. Looking at the charts above for Lam Research and Novellus, revenue and net income dropped each quarter in 2011, and Lam Research's net in Q1 2012, although up 30 percent q-t-q, was down 75 percent to the year ago quarter. In other words, earnings may not approach those of 2011.
Semiconductor sales are projected to grow only about 2 percent in 2012, but so far this year semiconductor sales are still dropping. While capex announcements from companies such as Intel, Samsung, and TSMC are in the stratosphere, overall capex is still projected to decrease about 10-12 percent.
Data for this article can be found in The Information Network report, "Applied Materials : Competing for World Dominance."