Advantest Poisoning Verigy Bid Creates Costliest Deal: Real M&A

Verigy Ltd.’s bid for LTX-Credence Corp., a little-noticed friendly merger within the semiconductor industry, is poised to explode after Advantest Corp. offered to acquire Verigy with a premium price not seen since the dot-com bubble of 2000.

Verigy, a maker of machines that test chips, reached an all-stock agreement to purchase rival LTX-Credence in November that now values the Milpitas, California-based company at $500 million including net debt. Japan’s Advantest, the world’s second-largest maker of chip-testing equipment, a month later stepped in with an unsolicited bid at a 68 percent premium for Verigy. LTX-Credence is trading 28 percent below Verigy’s offer price, indicating it’s the most likely among pending U.S. deals to fail, according to data compiled by Bloomberg.

Traders who profit from mergers and acquisitions are betting Advantest’s offer will prevail even as Verigy’s board recommends the LTX-Credence deal. Advantest, which has lost money the last two fiscal years, boosted its original $12.15-a-share bid to $15 to gain Verigy’s testing equipment for chips that run mobile devices such as Apple Inc.’s iPhone and iPad.

“The market is not giving a high probability for the current LTX-Verigy transaction to be completed,” said Will Harrington, a New York-based merger arbitrage analyst at Wall Street Access. “There is a real possibility that a deal is struck with Advantest and that the LTX situation is terminated.”

Terminate Arrangement

Advantest’s $607 million proposal, including net debt, would create the world’s biggest manufacturer of equipment for testing semiconductors. Singapore-based Verigy, which would be required to terminate its arrangement with LTX-Credence, is still trading 14 percent below Tokyo-based Advantest’s offer amid concern from the board and investors that the bid may not be approved by regulators.

Yoichi Oyama, a spokesman for Advantest, said the company is still in talks with Verigy and declined to comment further. A phone call and e-mail to Judy Davies, a spokeswoman for Verigy, weren’t returned. Rich Yerganian, a spokesman for LTX-Credence, also didn’t respond to a call and e-mail.

The 68 percent premium to Verigy’s 20-day trading average that Advantest is offering is the highest for a chip-equipment takeover of at least $500 million in more than 10 years, data compiled by Bloomberg show. Veldhoven, Netherlands-based ASML Holding NV said in October 2000 it would buy Silicon Valley Group Inc. for $1.53 billion at an 84 percent premium. ASML, Europe’s biggest semiconductor-equipment maker, fell 31 percent in the year after the deal closed, compared with a 19 percent drop for the Stoxx Europe 600 Index.

Applied Materials

Earlier in 2000, Applied Materials Inc. of Santa Clara, California, bought Etec Systems Inc. for $1.7 billion, a 79 percent premium. Applied Materials’ stock fell 53 percent in the 12 months after the acquisition, while the Standard & Poor’s 500 Index declined 22 percent.

Deals in the industry were struck at an average 19 percent premium since the start of 2005, Bloomberg data show.

“The most likely scenario is for Verigy to be acquired by Advantest,” said Thomas Diffely, a Lake Oswego, Oregon-based research analyst at DA Davidson & Co. “It was a very good offer. It will be hard for them to pass up.”

Negotiations with Advantest executives have focused on regulatory hurdles, Verigy Chief Executive Officer Jorge Titinger said on an earnings conference call last week. The U.S. Department of Justice issued a second request for information on Feb. 18, he said. Orders dropped last quarter because some customers delayed final purchase decisions amid the uncertainty regarding LTX-Credence and Advantest, according to Titinger.


Prior to the Advantest bid, Verigy had offered 0.96 shares for each share of LTX-Credence, or the equivalent of a 39 percent premium based on both companies’ 20-day averages, to compete with larger rivals as demand for semiconductor-testing equipment shrinks. The new entity would be 56 percent owned by Verigy and generate cost savings of at least $25 million a year, they said in November.

“The proposed deal with Verigy made a lot of strategic sense because we didn’t have overlapping products and overlapping customers,” LTX-Credence Chief Executive Officer David Tacelli said on an earnings call last week. He said any other industry deals would not affect the company’s competitive position.

LTX-Credence closed yesterday at $8.94 on the Nasdaq Stock Market, $3.51 below Verigy’s bid. That’s still a 39 percent premium if the deal is completed, the highest for any pending U.S. takeover greater than $1 a share, data compiled by Bloomberg show.

Biggest Acquisition

Advantest is chasing Verigy in what would be its biggest acquisition in at least a decade after losing 86.4 billion yen ($1.1 billion) in the past two fiscal years. Advantest fell about 19 percent in Tokyo in the last 12 months, giving it a market value of $4.1 billion, trailing the 5.8 percent gain for the Nikkei 225 Stock Average.

Since sweetening its offer for Verigy on Dec. 23, Advantest shares have dropped 9.7 percent.

The Japanese company, which has no debt, is valued at 22 times earnings before interest, taxes, depreciation and amortization, the seventh highest among Nikkei 225 companies, data compiled by Bloomberg show.

Advantest’s takeover would value Verigy at 12 times Ebitda, in line with the industry median since 2005. Verigy’s bid values LTX-Credence at 6 times Ebitda, data compiled by Bloomberg show.

Agilent Technologies

Verigy was spun off from Santa Clara, California-based Agilent Technologies Inc., the world’s biggest maker of scientific-testing equipment, in 2006. The two were formerly part of Palo Alto, California-based Hewlett-Packard Co. Verigy posted adjusted profit of $34 million for fiscal 2010, which is projected to drop to $31 million this year, according to analysts’ estimates compiled by Bloomberg.

Teradyne Inc., based in North Reading, Massachusetts, has the largest market share of testing equipment sales at 36 percent, according to 2009 data compiled by Stamford, Connecticut-based market research firm Gartner Inc. Advantest was second with 24 percent, followed by Verigy with 20 percent and LTX-Credence at 7.9 percent.

“If Verigy and LTX-Credence integrate, Advantest will lose its current position,” said Haruo Sato, a Tokyo-based analyst at Tokai Tokyo Securities Co. “Advantest wants to stop their integration.”

‘Testing Challenges Remain’

Advantest needs new technology to lessen its reliance on memory-chip testing and to better combat Teradyne, according to Gus Richard, an analyst for Piper Jaffray Cos. in San Francisco. Verigy would help expand its so-called system on chip business, where demand is growing because of new mobile devices that rely on the chips. The need for testers in the memory-chip market has waned because the technology isn’t evolving as quickly.

“As devices get smaller and more complicated, the testing challenges remain,” DA Davidson’s Diffely said.

System on chip semiconductors are increasingly becoming the heart of mobile devices such as Cupertino, California-based Apple’s iPhone and iPad. The chips, a combination of several discrete semiconductors into one piece of silicon, require more comprehensive testing to make sure that all parts are functioning properly, according to Richard. Verigy makes the equipment to test such chips.

“Advantest wants Verigy to increase its share of the tester market and to beat Teradyne,” said Yuichi Ishida, a Tokyo-based analyst at Mizuho Investors Securities Co.

Health-Care REITs

Elsewhere in mergers and acquisitions, Ventas Inc., the owner of more than 600 senior-care and medical properties, agreed to buy Newport Beach, California-based Nationwide Health Properties Inc. for about $5.7 billion in the biggest deal ever among health-care real estate investment trusts.

Ventas will pay 0.7866 of its stock for each Nationwide share, the Chicago-based company said in a statement yesterday. That’s equal to about $44.99 as of Ventas’s closing share price on Feb. 25, a 15 percent premium to Nationwide’s close that day.

Health Care REIT Inc. of Toledo, Ohio, the third-largest U.S. health-care REIT, agreed to buy substantially all the property assets of Genesis HealthCare for $2.4 billion.

There have been 3,696 deals announced globally this year, totaling $360 billion, a 27 percent increase from the $283.7 billion in the same period in 2010, according to data compiled by Bloomberg.

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