Wire: BLOOMBERG News (BN) Date: May 5 2011 16:16:44
Applied Materials’ Varian Purchase May Spur Equipment Deals
By Ian King
May 5 (Bloomberg) -- Applied Materials Inc.’s $4.9 billion
purchase of Varian Semiconductor Equipment Associates Inc. may
trigger a round of acquisitions in the chip-machinery industry,
making companies such as Novellus Systems Inc. possible targets.
Applied Materials, the world’s biggest maker of equipment
that creates semiconductors, said yesterday it’s paying a 55
percent premium for Varian, to help regain ground in a business
where it had lost market share. Executives across the chipmaking
industry may follow with their own deals to add revenue and
lessen price pressure while taking advantage of low borrowing
costs, said Patrick Ho, an analyst at Stifel Nicolaus.
“I expect other companies to leverage and use their
balance sheets as well,” said Ho, who is based in Dallas. “In
the equipment space, you need consolidation to remove a lot of
the excess pricing pressure that you typically get when there
are a lot of companies participating in the same space.”
ASML Holding NV and Lam Research Corp., which also build
chipmaking machinery, may look for candidates among a list that
includes Novellus, Cymer Inc. and KLA-Tencor Corp., said C.J.
Muse, an analyst at Barclays Capital in New York. Applied
Materials is also probably not finished buying, he said.
KLA-Tencor itself may become acquisitive, according to Ho.
The Applied acquisition of Varian also has revived speculation
that Lam and Novellus might combine.
Supercomputers to Mobile Phones
Novellus jumped 7.6 percent, or $2.50, to $35.42 today,
rounding out its best two-day performance since 2002, after a
6.5 percent gain yesterday. The premium Applied Materials paid
for Varian, whose stock rallied 51 percent yesterday, indicates
that chip-equipment makers may be more highly valuing their
peers than the stock market does, said Edwin Mok, a Needham &
Co. analyst.
In 37 industry acquisitions, the median multiple paid --
based on earnings before interest, taxes, depreciation and
amortization -- was 11.8 times. Applied Materials agreed to pay
13.4 times Ebitda based on analysts’ estimates for Varian’s
earnings in the current year, according to Bloomberg data.
Applied, based in Santa Clara, California, is the world’s
largest maker of machines that turn discs of silicon into the
electronic components that are the heart of devices ranging from
supercomputers to mobile phones.
While Applied has machines for many phases of the
multistage process of creating chips, most companies specialize
in one area. Varian has expertise in ion-implantation machinery,
a technology needed across all types of chips, and increasingly
used in solar panels and light-emitting diodes, or LEDs. The
company’s sales more than doubled last year.
KLA-Tencor machines check that parts of the process have
been completed. Novellus equipment processes wafers in the early
parts of a procedure that can take three months to complete.
‘Pretty Cheap’
“The group is pretty cheap compared to what Applied is
willing to pay,” said Mok, who is based in San Francisco.
“Applied has historically been pretty stringent about how much
they offer in these deals. It highlights the fact that people in
the industry have a way of valuing these companies that’s
different to what the Street is seeing.”
Tokyo Electron Ltd., Japan’s largest producer of
semiconductor equipment, may follow Applied in trying to buy
back lost market share through acquisitions, Mok said.
Novellus’s gains are partly based on speculation that the
Japanese company may look at it, he said.
Representatives from KLA-Tencor, ASML, Novellus, Lam
Research and Cymer didn’t respond to calls and messages seeking
comment.
Rise in Acquisitions
Companies worldwide have proposed $833 billion of mergers
and acquisitions so far in 2011, on pace for $2.45 trillion this
year. That would be a 10 percent increase over the $2.23
trillion of deals in 2010. Companies struck $678 billion of
transactions during the same period last year.
The Varian acquisition would be the biggest in the
semiconductor-equipment market in the past five years, according
to Bloomberg data. Applied Materials is the industry’s most
acquisitive company, with 13 announced deals in that period. In
2009, it agreed to purchase Semitool Inc. for about $364
million, helping it upgrade technology used in the preparation
of silicon wafers.
Stockpiles of cash and the ability to raise debt may prompt
companies in the industry to seek more purchases, said Weston
Twigg, a Pacific Crest Securities analyst. A slump in earnings
from 2007 to 2009 forced many companies to fire staff and cut
underperforming businesses, making them more attractive now that
demand has returned, he said.
Rudolph, Nanometrics
In addition, the shrinking number of customers prepared to
commit as much as $5 billion to build a chip plant, as well as
Applied’s growing reach, may prompt other equipment makers to
get together, Twigg said. Rudolph Technologies Inc. and
Nanometrics Inc. are two companies that would do well if
purchased and given the scale of a larger organization,
according to Twigg.
Virginia Becker, a spokeswoman for Rudolph, said she had no
immediate comment, and David Viera, a Nanometrics spokesman,
declined to comment.
“They are both pretty good companies and bring a lot of
value,” Twigg said. “They are small and would benefit from an
acquisition.”