Intel Investing $4.1 Billion in ASML to Speed Production

Intel Agrees to Buy 15% of ASML in $4.1 Billion Investment
Frederic Schneider-Maunoury, COO of ASML Holding NV, shows off a "clean room" at ASML's plant. Intel Corp. agreed to invest billions in the chip maker. Photographer: Sven Hoppe/DAPD/AP Photo

Intel Corp., the world’s largest semiconductor maker, agreed to invest as much as $4.1 billion in Dutch chip-equipment maker ASML Holding NV in an effort to shave two years from the time to adopt new production techniques.

The U.S. company said yesterday it will take an initial 10 percent stake in ASML for about $2.1 billion, and later another 5 percent for about $1 billion, pending shareholder approval. ASML, whose shares rose as much as 11 percent in Amsterdam, is also in talks with Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. to sell as much as another 10 percent of its shares, Chief Executive Officer Eric Meurice said on a conference call today.

Companies that invest agree to help ASML fund research and development for the new technologies. Intel wants to speed the development of a costly, advanced chipmaking technique known as extreme ultraviolet -- or EUV --lithography, which is used to make semiconductors that are more powerful even as they become tinier. It’s also trying to help ASML step up the transition to a new chipmaking standard that relies on 450-millimeter disks of silicon, compared with the current 300-millimeter standard --a shift will enable manufacturers to produce more chips faster.

“It’s a win-win where we get free funding which will help us in the future, and they get the possibility of appreciation through this funding,” Meurice said on the call. Europe’s largest semiconductor-equipment maker may hire as many as 1,200 engineers to roll out of the new technologies faster, he said.

Critical Mass

ASML, based in Veldhoven, the Netherlands, said machines using 450-millimeter may be available as early as 2018 and will probably initially be bought by larger customers who can achieve a critical mass in production. The machines will be about three to four times as expensive as the 300-millimeter variety, which may promote consolidation in the chip-making industry, the company said. Samsung, Intel and TSMC together account for about 41 percent of ASML’s revenue, data compiled by Bloomberg show.

While current-generation equipment costs about 20 million euros ($24.6 million) to 25 million euros a piece, the price of that future generation may approach 100 million euros, said Marcel Achterberg, an Amsterdam-based analyst at Petercam SA. The company may be able to maintain a gross margin of about 45 percent on the machines with the agreement, he estimated.

ASML will be able to obtain better prices for its products from its partners by agreeing to the equity investment, Meurice said on the call. Under the agreement, Intel plans to fund ASML’s development of the new techniques with about 830 million euros. The Dutch company said it expects to receive about 1.38 billion euros in development funding from 2013 through 2017 if it sells a total of 25 percent of shares.

Synthetic Buyback

To avoid diluting shareholdings, ASML will carry out a synthetic share buyback, meaning it pays out the subscription proceeds to original investors and reduces the number of shares outstanding.

ASML may raise the minimum price of 39.91 euros a share that it offers to additional investors after 45 days, depending on the stock’s performance, Chief Financial Officer Peter Wennink said, adding that the company isn’t handing out voting shares to customers as it wants to stay “fully independent.” None of the participating customers may raise their stake to more than 19.9 percent under the program for six years.

ASML Soars

ASML rose 8.6 percent to 43.15 euros at the close in Amsterdam today for its biggest daily increase since September 2008. The stock has gained 33 percent this year. Nikon Corp., ASML’s main rival, fell the most in more than a year in Tokyo after the alliance with Santa Clara, California-based Intel was announced.

“We interpret the move as Intel throwing in the towel on Nikon,” Pierre Ferragu, a London-based analyst at Sanford C. Bernstein Ltd., said in a note.

Intel fell 2.3 percent to $25.56 at the close in New York today. The stock has risen 5.4 percent this year.

“We’re asking for two extremely large technical transitions to occur at ASML, and it was beyond their capabilities on their own,” Intel Chief Operating Officer Brian Krzanich said in an interview. Industrywide demand for new ASML machines means “it becomes a good investment for our shareholders.”

Intel’s backing will help cut two years off the time it takes to begin producing chips using both new manufacturing methods. Intel has used investments like this to create state-of-the-art factories and production techniques that help set it apart from other chipmakers.

“Intel realizes they need 450 sooner than anyone can give it to them,” said Patrick Wang, a New York-based analyst for Evercore Partners Inc. “If they see a limit, down the road, which presumably they are, you could argue” it’s a good use of cash. He rates Intel shares equal weight.

Early Access

The transition to larger wafers will deliver a reduction of 30 percent to 40 percent in the cost of a chip, according to Krzanich. Intel’s cash won’t guarantee early access to the new tools or give it control over ASML, he said.

Separately, Intel rival Advanced Micro Devices Inc. yesterday said second-quarter sales fell 11 percent from the previous period, compared with an earlier forecast for a gain of as much as 6 percent, citing weaker-than-expected sales in China and Europe, as well as tepid consumer demand.

AMD, the No. 2 maker of processors for personal computers after Intel, had previously forecast that second-quarter sales would rise 3 percent, plus or minus 3 percent.