Tokyo Electron Seeks Deals After Applied Materials Takeover

Tokyo Electron Ltd. (8035), which agreed to be bought by Applied Materials Inc. (AMAT) for $9.39 billion, will seek deals to build on the combined company’s share of the market for chipmaking equipment.

“We’re going to find merger and acquisition opportunities even as the integration of the two companies gets us to about 25 percent of the global market,” Tokyo Electron President Tetsuro Higashi said in an interview yesterday.

Applied Materials agreed to buy its rival with stock as equipment makers mirror an increasing concentration within their customer base of semiconductor makers. Further deals may take place amid a shrinking pool of clients and rising costs for research and development, Yoshihiro Azuma, an analyst at Jefferies Group LLC, said in a Sept. 26 report.

Increasing the reach of the combined company may prove difficult as it already would have the ability to produce most of the machinery used in chip plants, or fabs, said Weston Twigg, an analyst at Pacific Crest Securities.

“I would be surprised if they were very active right away,” he said. “There aren’t that many gaps. They cover most of the processes in the fab.”

Tokyo Electron’s Higashi will become chairman of the combined company while Gary Dickerson is moving to Tokyo to become chief executive officer, the position he holds at Santa Clara, California-based Applied Materials.

Japan Move

Tokyo Electron fell 0.8 percent to 5,170 yen in Tokyo trading. The shares have gained 6.6 percent since since the takeover was announced Sept. 24. Applied Materials lost 0.4 percent yesterday to $17.47.

The 64-year-old Higashi wants Dickerson to increase communication with Tokyo-based employees and familiarize himself with Japanese culture as soon as the deal is closed, which he expects in 2014, he said.

The two executives, who have known each other for 30 years, spent nine months working out the details of the deal, the largest for a Japanese company from outside the country in six years.

“Succeeding in the Asian market is crucial for U.S. and Japanese companies to sustain their business growth in the global market,” Higashi said.

The deal, which combines two of the three largest equipment makers, is subject to clearance from antitrust regulators.

Semiconductor Spending

The companies make machines that prepare silicon wafers for imprinting with the circuits that turn them into processors capable of crunching numbers, showing video and connecting to mobile networks, among other tasks.

Spending on semiconductor equipment is projected to decline 8.5 percent to $34.6 billion this year, hurt by shrinking investment by chip manufacturers, according to Gartner Inc. (IT) Spending by the top five chipmakers will make up more than 65 percent of total 2013 spending, the Stamford, Connecticut-based research firm said.

A new name for the combined company has yet to be decided and it will seek dual-listings on the Tokyo Stock Exchange and Nasdaq OMX Group Inc. once the deal closes. Filings to the bourses will be made in early 2014, he said.

“I prefer a shorter and simple name,” Higashi said.

Under the deal, Tokyo Electron shareholders get 3.25 shares of the new company for every share they hold which valued the offer at $9.39 billion when it was announced.

Annual Savings

Higashi doesn’t see any need for the company to raise funds in a listing, he said. Annual savings in the first full financial year are expected to reach $250 million before rising to $500 million in the third year.

Tokyo Electron had about $2.3 billion of cash and equivalents as of June 30 with no debt, according to data compiled by Bloomberg. Applied Materials has $2 billion of cash and $1.9 billion of borrowing as of July 28.

Intel Corp. (INTC), Taiwan Semiconductor Manufacturing Co. (2330) and Samsung Electronics Co. (005930) now buy the majority of the production machines deployed by the industry, making the earnings of their suppliers more volatile. Veldhoven, Netherlands-based ASML Holding NV (ASML), Europe’s biggest chipmaking-tools supplier, completed its purchase of San Diego-based Cymer Inc. in May to expand in extreme ultraviolet lithography technology.

Source: Bloomberg