Applied Materials’ Varian Purchase May Spur Equipment Deals

Applied Material Inc. CEO Mike Splinter
Michael "Mike" Splinter, chief executive officer of Applied Materials Inc. Photographer: Munshi Ahmed/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.”

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