by James Montgomery, news editor

May 6, 2011 - Applied Materials' $4.9B acquisition of Varian Semiconductor is turning industry watchers' heads, and generating two lines of questions: Is AMAT paying too much for what it's getting? And is more M&A on the way?


Did AMAT pay too much? Adding VSEA's market-dominant ion implant technology to its silicon systems group (SSG) gives AMAT almost total breadth across the wafer-fab equipment spectrum (except litho), from transistor to interconnect to wafer-level packaging. "Essentially AMAT gains close to 10 points of total FEOL equipment TAM, and they have now ~40% of non-litho FEOL total available market," calculates Risto Puhakka, president of VLSI Research.

From a valuation standpoint, essentially AMAT is paying 4× VSEA earnings, and a 13.4× multiple based on EBITDA (vs. 11.8× media average, for five years and 37 deals). Barclays analyst CJ Muse calculates a P/E of 17× based on estimated CY11 EPS of $3.65. General consensus is that the price was high. "We were stunned (at the price paid)," said Peter C. Andersen with Congress Asset Management in Boston. "They paid for the company that has the right technology to be the market leaders for a number of years," added Caris & Co analyst Ben Pang. (As has become ritual for any M&A, legal firms are coming out of the woodwork to protest whether VSEA should have held out for a better offer, from AMAT or another suitor. If VSEA does find a higher bidder, the companies' SEC filing stipulates a $147M breakup fee; if the deal is scuttled due to "failure to obtain certain antitrust approvals" AMAT will owe $200M.)

Note that AMAT exited the beamline implant market nearly four years ago, capitulating the market to VSEA, whose single-wafer technology was gaining traction. "There was no way for AMAT to catch up without significant expenditure and head-on market share battle, with uncertain outcome," notes Puhakka. "At the same time AMAT saw the potential for plasma doping, so they chose to exit implant and continue investment to plasma doping." (Others offer more pointed assessments: "The writing was on the wall when Varian did the ribbon beam, dual magnets, and single-wafer high current," said VLSI Research's Dan Hutcheson. "VSEA was crushing them. They were losing hundreds of millions of dollars per year at the end," summed Barclays analyst CJ Muse.) Indeed, AMAT just recently unveiled a new tool for conformal plasma doping, billed as a replacement for ion beam implant. "Unless there are IP issues they should not have needed to purchase Varian for that purpose," suggests Gartner analyst Dean Freeman.

Beyond semiconductor manufacturing both AMAT and VSEA (like other chip equipment suppliers) have been pushing their equipment into the solar PV field: VSEA with its Solion tool to replace diffusion steps, and Applied with c-Si printing & wafering equipment (though a turnkey thin-film effort didn't work out).

In a recent report, Barclays' Muse projected a big ramp for Solion adoption over the next year. Five tools are already shipped, he said: one each to the US, Europe, Taiwan, China, and Korea -- the US customer, Suniva, is already using the tool in volume production (p-type cells) surpassing ~19% cell efficiency -- and another ~20 customers are in various level of "engagement." VSEA sees a $250M total market for the Solion tool, increasing to ≥$800M over the next few years.

There is some extra valuation given the extension of VSEA's implant technology into solar and other high-growth markets, but not enough to justify the $4.9B pricetag, Freeman suggests: "AMAT sees some value that is currently a mystery to me."


Is this a M&A catalyst? With most M&A, talk inevitably turns to who else might be next, both as consolidator and consolidatee. "This deal is so large that it puts practically all equipment companies at $1B or below into a play," said Puhakka. "We just see continued consolidation in the industry." Now appears to be a good time for M&A activity in the chip equipment sector for a number of reasons, explains Credit Suisse's Satya Kumar: "the cycle is neither too hot nor too cold, absolute valuations are neither at trough nor at peak, cash generation continues to be very strong, [and] on earnings stocks are trading at very low P/Es (<7-8× ex-cash), which makes it easy for acquiring companies to justify M&A."

With its warchest and clout AMAT has always been seen as a potential M&A party-starter, and has stated several times it will eagerly pull the trigger where and when it sees a fit. But AMAT likely will have to take a back seat now, given the size of the proposed VSEA deal (its biggest M&A to date and the market's biggest in five years), and the fact that it is having to increase an existing undrawn credit facility to $1.5B, plus take on a $2B loan commitment and planned long-term debt financing from JPMorgan Chase, Citigroup, and Morgan Stanley.

CJ Muse from Barclays views AMAT, ASML, and LRCX as potential consolidators with scale and leadership, potentially targeting pure-play markeshare-leading companies such as CYMI, NVLS, and KLAC, who have specific targeted technology and attractive assets. Kumar notes potential targets include CYMI and UTEK, and TER as both a consolidator and possible target for a non-semicap test company. And with things slowly returning to normal in post-disaster Japan, longtime AMAT rival Tokyo Electron (TEL) could be weighing its options too: it has a similar net-cash position ($3.5B). "TEL could view an acquisition of NVLS at ~$50/share as accretive and attractive," he writes, noting that NVLS has a similar market capitalization as pre-announcement VSEA.

Also benefiting could be other suppliers (e.g. Axcelis, Nissin, SEN), if customers feel skittish about a combined AMAT-VSEA having too much of the implant pie, noted Gartner's Freeman. (Recall Axcelis and SEN had a nasty public spat a couple years ago over their own failed M&A.)

Maybe the real winners? Bankers, Freeman quipped.