Lam Research Corporation Announces Intent to Acquire the SEZ Group Transcript

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 |  About: Lam Research Corporation (LRCX)
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Lam Research Corporation (NASDAQ:LRCX)

Lam Research Corporation Announces Intent to Acquire the SEZ Group

December 11, 2007, 1:00 PM ET

Executives

Carol Raeburn - Senior Director, IR

Stephen G. Newberry - President, CEO and Director

Martin Anstice - CFO

Analysts

Harlan Sur - Morgan Stanley

Patrick Ho - Stifel Nicolaus

C.J. Muse - Lehman Brothers

Timothy Arcuri - Citigroup

Timothy Summers - Stanford Group Company

Mark Fitzgerald - Banc of America Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Lam Research Conference Call to Discuss the Acquisition of the SEZ Group. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. As a reminder, the call is being recorded. This conference is scheduled to take to conclude at 11O'clock today. At this time, I would like to turn the conference over to our host, Ms. Carol Raeburn, Senior Director of Investor Relations. Please go ahead ma'am.

Carol Raeburn - Senior Director, Investor Relations

Thank you operator. Good morning and thank you for joining Lam Research Corporation's call to discuss the planned acquisition of the SEZ Group. Here today are Steve Newberry, President and Chief Executive Officer and Martin Anstince, Chief Financial Officer.

Today's call contains forward-looking statements that are subject to Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to our expectations of future revenue, profitability and margin, the benefits of our merger with SEZ and our expectations surrounding the closing of the transaction between Lam and SEZ such as timing, shareholder participation and the ultimate cost. Some factors that may affect these forward-looking statements include changing business conditions in the semiconductor industry and the overall economy and our plans for reacting to those changes, the success of our marketing and sales strategies, the success of our competitors' strategies and their reactions to the merger. These forward-looking statements are based on current expectations and are subject to uncertainties and changes in conditions, significance, value and effect as well as other risks detailed in documents filed with the Securities and Exchange Commission including specifically the report on Form 10-K for the year ended June 25, 2006 which could cause actual results to vary from expectations. As a result, the reader should not place undue weight on such forward-looking statements.

This call is scheduled to last until 10.30 AM and we ask that you please limit questions to one per firm.

With that, I'll turn the call over to Steve.

Stephen G. Newberry - President, Chief Executive Officer and Director

Thank you, Carol. Good day and thank you all for joining the call regarding the announcement of our intent to acquire the SEZ Group.

As you know, yesterday afternoon Lam Research announced the signing of a definitive agreement to acquire the SEZ Group for $447 million net of cash in an all cash transaction. This deal presents both Lam and SEZ with an outstanding opportunity to establish a strong leadership position, both in terms of market and technology leadership in the increasingly important wafer cleaning segment of the wafer fab equipment industry.

In the next few minutes, I'll provide a brief overview of this transaction and give you some color on the strategic logic behind it and then we'll take a few questions.

SEZ today is the leading supplier of single wafer cleaning solutions to the semiconductor manufacturing industry. The company is headquartered in Zurich, Switzerland with its principal operating facilities in Villach, Austria. Lam is made a commitment to maintain the Villach operations for at least the next few years, which we think will continue to play an important role as we integrate our products and technologies to exploit our comprehensive set of front end and back end of the line wafer cleaning solutions.

SEZ employs a proprietary Spin-Processor wafer cleaning technology and has built a broad technology-based solution portfolio. Their existing back end of the line business enjoys the largest installed base in the global clean business and the company has an emerging business in front end of the line single wafer solutions.

SEZ has published guidance for calendar 2007 of revenue in the range of about $293 million. The company is profitable, well managed and we think it is very well positioned for future revenue and profitable growth.

Let's quickly review the terms. Lam will be acquiring all assets of SEZ including the Villach operations I just mentioned. Total purchase price is $568 million or $447 million net of cash on the SEZ balance sheet, representing about a 41% premium to yesterday's closing share price of 27 Swiss Francs and a 38% premium to the 100 day moving average. The entire purchase price will be funded with available cash and, as many of you know, Lam reported a net cash position of approximately $1 billion as of the end of the September 2007 quarter.

We will operate SEZ as a division of Lam Research with all key SEZ executives continuing on in significant roles in the new clean division. SEZ has an established worldwide organization and infrastructure including approximately 900 employees, half of which are in Villach. We think this structure provides us a solid framework to build a highly effective global clean business. We will maintain Villach as the headquarters of our spin products and the combined management teams will begin working immediately on integration plans to best support customers and identify specific opportunities to grow the business.

Transaction has been approved by the boards of directors of both companies and Lam has completed due diligence. SEZ is publicly traded in Zurich, and thus shareholder approval is required. There are also local market regulatory approvals necessary, and pending those approvals, we are currently targeting a closing in the first quarter of calendar 2008.

We see SEZ's existing infrastructure as beneficial to our strategy of building a successful, full spectrum clean business. As a result, this transaction is about growth and capitalizing on key customer needs in wafer cleaning on a global scale. There will be some limited synergies in the short term as we move through the integration process, but overall, we would expect the deal to be neutral to slightly accretive to Lam's earnings in calendar 2008 and then more accretive as we benefit from revenue growth, product differentiation, scale efficiencies and additional synergies going forward.

We think there is a compelling rationale underlying this transaction. Lam's multi-year growth strategy has included a significant commitment to the clean segment, a key process adjacent to etch where we are the worldwide market share leader. The acquisition of SEZ will accelerate our entry into clean by combining SEZ's position as the installed base and single wafer market share leader with our emerging clean technologies, our processing integration capabilities and our global scale.

We have talked for some time now about customers increasing technology challenges around the cleaning process, particularly yield-related issues post etch and strip. Clean is becoming a more technology-driven process where customers are asking us to widen the process window for post-etch residue removal and looking to reduce cycle time for front-end wafer cleaning activities. In this higher performance environment, current clean technologies are also required to limit physical damage to the wafer during particle removal and to enhance the drying process with no remaining fluid residues. These developed... developments create a tremendous opportunity for Lam to leverage its leadership and knowledge base in etch into a wafer clean segment that we anticipate will approach $1.2 billion and serve the available market by 2010, encompassing single wafer wet and double clean.

Our strong knowledge base in residue formation and deposition has led to the development of our Confined Chemical Cleaning technology. We have launched our plasma-based bevel cleaner to excellent customer response and have many clean chambers in the field under extensive evaluation with many of the IC world's leading-edge technology companies. Adding the operational, technology and engineering capabilities of SEZ as well as its large installed base and strong customer relations will take this capability to a new level. The combination of Lam and SEZ gives us the ability to accelerate bringing new technologies to market and offers the most comprehensive set of cleaning solutions in the industry. This line up will include both spin and linear wet clean technologies for front end and back end of the line applications as well as our plasma etch-based Bevel clear.

So in summary, we look forward to sharing more details on how Lam and SEZ will work together to capitalize on the opportunities in the global clean market as we move past closing of the transaction. In the meantime, I'll sum up by saying that our intended acquisition of SEZ firmly demonstrates our commitment to executing on our multi-product, multi-market growth strategy and we are combining the world's largest single wafer clean company with Lam's emerging innovative clean technologies, our ability to engineer standalone and integrated tools that offer improved yield and cycle time benefits. With SEZ, we'll enhance our ability to deliver the most comprehensive advanced technology solutions for wafer cleaning, facilitating our objective of delivering superior growth relative to the wafer fab equipment market over the next three years.

So thank you again for joining us and now we'll take a few questions

Question And Answer

Operator

Thank you, sir. We will now begin the question and answer session. [Operator Instructions]. Our first question comes from the line of Gary Hsueh with CIBC World Markets.

Unidentified Analyst

Hi. This is Wang Young [ph] representing Gary. So SEZ has a pretty strong product focus at the back end of the line, which is also the focus of Lam's own waxing [ph] program. My question is does this acquisition indicate a step back of your own product effort? If not, what do you see as the product synergy between the two products?

Stephen G. Newberry - President, Chief Executive Officer and Director

Well, I think, one, the initial focus of our product two years ago was the back end of the line using short contact dilute HF or post-copper via clean up. We have shifted that focus over a year ago to the front end of the line where there are significant opportunities and need for residue and CD control for high k metal gates and high aspect ratio contact cleaning as well as some spacers and other hard mass process cleaning. So from that standpoint, SEZ's position in the back end, which is a very strong market share position, strong customer relationships facilitates the ability for us to bring a complementary set of products where SEZ is very strong in the back end and we are focused in the future on delivering back-end solutions for porous low k when that enters into the 3X and 2X technology nodes. And together we will work on penetrating and growing market share in the emerging fast growing front end of the market segment.

Operator

Thank you, sir. Our next question comes from the line of Harlan Sur with Morgan Stanley.

Harlan Sur - Morgan Stanley

Hi, congratulations on the announcement. Steve, between [ph] SEZ from a technology perspective, manufacturing, cost of ownership, I would agree best in class. But the key question in my mind is that segment profitability in wet clean seems to be sort of pinned at less than 10% operating margin for all competitors in this space, whether it's Dainippon, Nortel or SEZ. So the question to you is how is the Lam team going to improve the profitability situation for this segment, because it does seem to be something structural and specific to the dynamics of this particular segment of the equipment market?

Stephen G. Newberry - President, Chief Executive Officer and Director

Yes, thank you Harlan. [indiscernibleI think that there is clearly a segment of the clean market that in the past, and it will be through to a certain degree going forward but less so, has largely been an undifferentiated space, competitors using the same chemicals. And fundamentally, the ability to create differentiation was a function of throughput, cost per wafer, responsiveness, customization, customer relationships and trust, which ultimately led to a situation where you are not going to get premium pricing from a gross margin standpoint in that environment. So I think one of the things that facilitates that is it's not about a gross margin percentage play; it's about gross margin dollars and leveraging operating expense infrastructure, which, a company of Lam's size and scale, if you look at our revenue per employee is 8, 900,000. Smaller companies in the mid cap space where they are 250 to 500 million typically run 300,000 per employee, because to be a global player, it requires a lot of infrastructure. And so as we go forward and as we capitalize on the revenue opportunities, I see us basically being able to bring down the operating expense ratio as a percent of revenue.

I see Lam and SEZ together leveraging our global supply base more effectively so that we can increase potentially the competitiveness relative to product costs. And I think that most importantly, there are a significant number of clean applications now where the ability to create a differentiated result, the use of very strong process engineering knowledge, integrated device knowledge are becoming more and more important. And so those segments will offer us opportunities to create differentiated capability, get the pricing power as a function of that. But I do think that with our global scale and our efficiencies and our business model that over time we'll be able to bring a better set of operating margin dollars and percent than historically you've seen from this industry.

Martin Anstice - Chief Financial Officer

I think, Harlan, I would add that I think your segment's analogy around operating income percentage at the 10% level is also a statement of the size of the company independent of segments. I think if you look at $300 million revenue capital equipment companies, it's not so far different from the average. And to Steve's point, it is all about sale economies, differentiation and the leverage and utilization of resources worldwide, which is the assets of the enterprise combined and the people. And one of the realities of the combination at this point in time is we are as a standalone company still in the very early stages of building the infrastructure around the world, and so we are faced with a unique opportunity to leverage what already exits and to get to our plan of execution faster.

Operator

Thank you, sir. Our next question comes from the line of Patrick Ho with Stifel Nicolaus

Patrick Ho - Stifel Nicolaus

Thanks a lot. Steve, can you discuss some of the complementary technologies between your solution at this point and SEZ's? From what I understand of SEZ, they have a very low contact or minimal contact clean technology and they use of lot of different chemistry. What are some of the complementary technologies on your end that both of you, both companies can offer going forward?

Stephen G. Newberry - President, Chief Executive Officer and Director

Well, I think Patrick the aspect of complementary is actually maybe a little bit different than what you characterize. SEZ utilizes a proprietary rotary spin type technology. It actually has longer contact times relative to our linear-based technology, which is very fast, very short contact time in the range of typically one to two to five seconds. I think that single wafer tools are viewed as short contact time relative to the contact times of the traditional batch, wet batch tools that really dominated the industry for so many years.

So what makes... what we are doing here complementary is that SEZ addresses a much broader segment of the market where the aspect of where short contact time capability or differentiation is not needed or is still to emerge more in the 3X or 2X environment. SEZ is very competitive, as you know, in the back end, has recently introduced a suite of new products to aggressively go after opportunities in the front end. And what we see is that there are a number of opportunities in the front end that are throughput driven, they are multiple chemical-driven, they are heated chemistry-driven, and SEZ has a product capability that's currently already designed to address that. Our tools are addressed or are designed to go after where short contact time and traditional chemistries would result in yield improvements and cycle time improvement. So we are complementary in that our technologies are broad across a wide range of applications, and that allows the customer to come to one company and in essence get all of their potential clean needs met from one supplier in what has been a relatively fragmented cleaning industry. So we think that the customers will view that positively. And in fact the feedback that we have gotten from the customer base relative to their assessment of this has been very positive.

Operator

Thank you, sir. Our next question comes from the line of C.J. Muse with Lehman Brothers.

C.J. Muse - Lehman Brothers

Yes. Good morning. I guess, Steve, my question for you is can you talk about the due diligence that you've done on SEZ and I guess satisfaction you have that DNS is not catching up with them in the back end of line?

Stephen G. Newberry - President, Chief Executive Officer and Director

Sure, I'll ask Martin to comment on a lot of the due diligence process because he led that activity and then we can talk a little bit about competitive activities after that.

Martin Anstice - Chief Financial Officer

So C.J., one of the realities here that may not be so obvious to folks is that we have actually been asked the discussion with SEZ for some time. In fact, the original dialogues between the two companies almost date back a year. And certainly for the last two or three months, there has been a very concentrated exchange of information and there are really in essence two elements to that. One of them is the business dialogue to your point, specific commentary on competitive differentiation, application targeting and new product roadmaps. And so we spent a fair amount of time looking at that, and obviously another element of that due diligence process is the work we do ourselves directly with our own customers. So that's how we kind of orchestrate that part of it and then there is the kind of more what I'll call administrative side of due diligence which has been kind of an activity over about a six week period focused on kind of more traditional areas of risk management, liability recognition, etcetera, etcetera. And we stepped through that process timely and feel very comfortable that we are on top of the significant issues, exposures and opportunities that the transaction presents itself with.

Stephen G. Newberry - President, Chief Executive Officer and Director

Okay. And relative to some competitive activities, I think that one of the things that people who understand this space recognize is that DNS has been the wet bench leader. The front end of the line, up until recently, has been historically dominated by wet bench applications. And at a little bit 65 nanometer and more so as you go forward in the 5X, 4X and 3X, customers are converting to single wafer solutions. I think that the opportunity is that DNS with the relationships with the front-end cleaning people has I think gotten off to an earlier start than what either SEZ or Lam was bringing to the party. I think we are still very early in the game relative to what's going to play out over the next two to three years in the front end. But I think that with SEZ's new product offerings and our C3, Confined Chemical Cleaning product, that we are going to offer the customers a very competitive set of single wafer capabilities that represent a significant revenue and market share growth opportunity for Lam. Next question please.

Operator

Our next question comes from the line of Timothy Arcuri with Citigroup.

Timothy Arcuri - Citigroup

Hi guys. Steve, typically, if you look at M&A activity in this sector, usually deals happen when either fundamentals get to a point where they aren't going to get any worse and so you are kind of in the right part of the cycle or deals happen when there are competitive bidding situations that kind of force a company into a deal. So I am wondering if you have to handicap those two scenarios, which one was this.

Stephen G. Newberry - President, Chief Executive Officer and Director

Well, I think that you could look at the timing of things, and perhaps your characterization is correct. But that's not what went into our activities. As Martin talked about, we have been in strategic discussions with SEZ for 9 or 10 months, which was not a function of looking at how do you time the cycle, how do you time the acquisition, but working together and talking to each other about what each of us thought the strategic benefits to each company would be and going through a process of understanding whether that made sense as we got more and more into the details of what they were doing, what we are doing and how we saw it fit. So I think that if I were to have my druthers, and you typically don't, my bias is that you try to do acquisitions if it's at all possible when you think the market slowing down from the standpoint of you are not into an upturn where you are running as hard and as fast as you can to execute. The ideal time to try to integrate a company is in a slower business environment, which I think that we've kind of entered in here. But the reality is that as it relates to this, if we were going into an upturn, it wouldn't change us executing to this. I think it's beneficial that we are headed in a slower environment because I think it facilitates the ability for both companies to get through the integration activities and get very well positioned, get aligned with the customer and then be able to take advantage of the increasing environment of growing purchases by the customers at some point in time later in 2008.

Operator

Our next question comes from the line of Jenny Eun with J. P. Morgan.

Unidentified Analyst

Good morning. I think you had mentioned previously that you'd be making infrastructure investments to support your new product ramp that would cause SG&A to rise in '08. Now that you've acquired SEZ which has a substantial sales force, do you need to still do the originally planned investment?

Stephen G. Newberry - President, Chief Executive Officer and Director

Well I think Jenny that what you have is an opportunity relative to... as you grow a business, you have investments in engineering, R&D and technology that are part of what you do where you are doing that development. And then as the product comes out of various stages of alpha release and beta release, you have to build up your field base forces, whether it's your sales and marketing people, your field service engineers, your process engineers and your technologists. Certainly, with the strength and the experience and the numbers of SEZ's sales, marketing and field-based service and technology people, we will be able to avoid adding that headcount and that cost and we will be able to benefit from the fact that we will bring those people into the combined activities of a coordinated integrated cleaning activity. So we will definitely save money from that perspective.

Operator

Our next question comes from the line of Ben Pang Caris & Company.

Unidentified Analyst

Thanks. This is Brett Pira [ph] filling in for Ben Pang. I was just wondering if there is any solar opportunity with this.

Stephen G. Newberry - President, Chief Executive Officer and Director

Well, I think that obviously in theory cleaning is an issue in terms of needs of the solar market, but Lam nor SEZ are focused on the solar market. So that did not factor into the decision making relative to this acquisition.

Carol Raeburn - Senior Director, Investor Relations

Operator, we have time for one more question.

Operator

Our last question comes from the line of Tim Summers with Stanford Group Company.

Timothy Summers - Stanford Group Company

Yes, thanks for taking the question. Can you tell us if there are any... if SEZ has any 10% customers? Do they have a business split between semi and non-semi and of the semi business, what the percentage is between memory, foundry and logic? Thanks.

Stephen G. Newberry - President, Chief Executive Officer and Director

Martin, can you comment on some of that?

Martin Anstice - Chief Financial Officer

Yes, I would say with kind of due respect to SEZ in their process of disclosure. Obviously, they are not duty bound to make such disclosure nor do they today. And so until they are ultimately part of our company and subject to that disclosure, we are unable to disclose that information.

Carol Raeburn - Senior Director, Investor Relations

We'll take one more question operator

Operator

Our next question comes from the line of Mark Fitzgerald with Banc of America Securities.

Mark Fitzgerald - Banc of America Securities

Hey Martin, I was curious if European employment law is preventing you from moving more aggressively to get some of the efficiencies built into the combined model here. The second question, I am curious, Steve, if the tel [ph] announcement at the trade show we just came from is... you view as competitive in this front end of line application.

Stephen G. Newberry - President, Chief Executive Officer and Director

Go ahead, Martin.

Martin Anstice - Chief Financial Officer

I would say, Mark, I mean I understand the base of your question, and it would be unrealistic for me to say that the regulations, rules and regulations in Europe are not tougher in terms of kind of making changes to headcount. But honestly, that's not the purpose and the reason for this acquisition. The purpose and the reason for this acquisition, as we've stated, are defined around growth and opportunity and leverage. And so we don't come in with a plan to make significant changes in terms of resource infrastructure in Europe anyway.

Stephen G. Newberry - President, Chief Executive Officer and Director

And then relative to the tel [ph] announcement, I think when you look at single wafer processing, you've got a lot of players who are in the space but fundamentally have no traction, have no position. I think if you look at what the offerings are from most companies, they are MEE 2 [ph] in the sense that they don't really bringing anything substantively significantly different to the party, which means that the entrenched install base competitors are far more likely to proliferate. The one company that's brought significant technical differentiation and capability differentiation is Lam with our linear Confined Chemical Cleaning capability. So while I never discount the capability of any competitor, I didn't see what tel [ph] is offering as bringing anything necessarily significantly different to the party.

Carol Raeburn - Senior Director, Investor Relations

We would like to thank you all for joining us today. Please be advised that our next regularly scheduled quarterly earnings call is set for January 24th at 1.30 PM Pacific. We hope you will join us then. Thank you and good bye.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation [indiscernible] AT&T Teleconferencing. You may now disconnect.

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