Applied Materials Will Buy Varian for $4.9 Billion

Applied Materials Inc. (AMAT), the largest producer of chipmaking equipment, agreed to pay $4.9 billion in cash for Varian Semiconductor Equipment Associates Inc. (VSEA), buying its way back into a business where it had lost ground.

The company will pay $63 a share, a 55 percent markup over yesterday’s closing price, Santa Clara, California-based Applied Materials said in a statement today. The merger was approved by the boards of both companies.

The transaction gets Applied Materials back into the business of ion-implantation machinery -- a stage in the creation of all computer chips -- where it had lost market share to Varian, said Patrick Ho, an analyst for Stifel Nicolaus & Co. in Dallas. Varian’s sales more than doubled last year, outpacing Applied Materials’ growth. The deal also brings technology used to make solar panels and light-emitting diodes, or LEDs.

“You’re getting a very high-quality company,” said Ho, who recommends buying Applied Materials shares. “They basically lost all their market share to Varian.”

Varian, based in Gloucester, Massachusetts, gained $20.81, or 51 percent, to $61.36 at 4 p.m. New York time in Nasdaq Stock Market trading. Applied Materials, up 7.4 percent this year, fell 15 cents, or 1 percent, to $15.09 today.

The transaction may help the company benefit from resurgent spending by semiconductor manufacturers, said Adrien Bommelaer, a London-based analyst at Matrix Corporate Capital LLP. “The addressable market is now very strong.”

More Deals

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 deal 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 time frame. In 2009, it agreed to purchase Semitool Inc. for about $364 million, helping it upgrade technology used in the preparation of silicon wafers.

In 37 industry acquisitions, the median multiple based on earnings before interest, taxes, depreciation and amortization paid 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.

Right Price?

“The price is full,” Joel Levington, a managing director at Brookfield Investment Management Inc. in New York, said in an e-mail. “But we believe that AMAT has the financial capacity to manage this transaction without materially impairing its credit quality, while strategically improving its business position.”

Applied Materials will be able to rapidly pay down the debt associated with the deal because it has about $2.7 billion of cash on hand and an estimated $1.2 billion or more of excess cash flow coming this year, Levington said.

The company’s A3 long-term credit rating won’t be affected by the acquisition, Moody’s Investors Service said.

Applied Materials Chief Executive Officer Mike Splinter has worked to diversify the company’s sources of income and is now supplying machinery used to make solar panels out of silicon wafers. Varian had net income of $160 million on sales of $832 million in the fiscal year ended in September.

“Varian is a great fit for our strategy to profitably grow share in our core semiconductor business with best-in-class technology and talent,” Splinter said today. “The pace of product innovation is accelerating, requiring devices that are more mobile, more connected and more personalized.”

Rosy Forecasts

Chipmakers are projecting an uptick in sales this year. Intel Corp. (INTC), the world’s biggest semiconductor producer, topped analysts’ estimates with its second-quarter revenue forecast last month. Infineon Technologies AG, Europe’s second-largest chipmaker, raised its full-year forecast yesterday for the fifth time since the beginning of 2010.

Credit Suisse Group AG and Simpson Thacher & Bartlett LLP advised Varian on the deal. Applied Materials was advised by Morgan Stanley and Dewey & LeBoeuf LLP.

JPMorgan Chase & Co., Citigroup Inc. and Morgan Stanley agreed to provide a one-year bridge loan of as much as $2 billion to help pay for the acquisition, Applied Materials said today in a regulatory filing. The company also said it has commitments from the banks to raise a four-year senior unsecured revolving loan of $1.5 billion, which will replace a $1 billion credit line expiring in January.

Bridge facilities are typically used to backstop bond offerings, and companies don’t draw on them. In a revolving credit facility, money can be borrowed again once it’s repaid.

If Varian backs out of the deal under certain conditions, it would owe Applied Materials a $147 million breakup fee, according to the filing. If Applied Materials terminates the transaction because it can’t pass antitrust scrutiny, the company would pay $200 million to Varian.

To contact the reporters on this story: Jonathan Browning in London at jbrowning9@bloomberg.net; Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net; Tom Giles at tgiles@bloomberg.net

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