If you have the chance to sell your company while its stock is at a record high, then you'd be crazy not to explore the opportunity. The board of Hitachi Kokusai is not crazy.
With the shares close to a 20-year peak , the semiconductor equipment maker is wisely considering a sale to ASM International, with interest also coming from Chinese and U.S. suitors, Bloomberg News reported late Monday.
Majority-owned by Hitachi, Kokusai has two distinct businesses that seem unrelated. Around half its sales come from video and wireless networking systems including broadcasting equipment, TV and surveillance cameras, and aircraft communications. The other half comes from a specific sliver of the semiconductor equipment business involved in heat treatment of chips during production, which the company calls environment and thin-film process.
While revenue between the two divisions is similar, the video and networking unit has brought in about a quarter of the operating income of its semiconductor colleague over the past four years. Clearly, the chip business is the company's star performer.
That would make a sale now quite timely. To date, the equipment sector has seen only moderate success in M&A when compared with chip designers and device makers. Lam Research's failed $11 billion bid for KLA-Tencor comes on the back of an aborted Applied Materials-Tokyo Electron merger that even got backing from the companies' clients. Kokusai has a market cap of only about $2 billion, making a takeover unlikely to offend the sensibilities of antitrust regulators.
Kokusai's stock has had a good year, climbing 18 percent. That looks pretty impressive given that the Topix Small Index is down 7 percent, except that it's not even among the top 200 best performers on the 1,469-member gauge. A Bloomberg Intelligence index of chip manufacturing equipment and components makers has gained 22 percent. ASM International, up less than 4 percent this year, is one of the few major chip-equipment makers to underperform Hitachi Kokusai.
Making a deal even more opportune, for Hitachi, is that Kokusai's chip business is starting to show weakness. Fiscal first-quarter orders fell 22 percent, revenue dropped 43 percent and operating income plummeted 72 percent. Despite a predicted pickup in the second half, the company forecasts full-year operating income will decline 37 percent. Kokusai shares are trading at their highest multiple to analysts' estimated earnings since 2013.
The company's struggles are playing out through the industry, with Gartner predicting a decline in global equipment spending this year after a weak 2015. So stocks are up, revenue is down and incomes are hurting. Investors may be betting on some distant oasis of growth and profitability, but given the structural problems, which I have discussed previously, they may be staring at a mirage.
That makes a successful Kokusai sale even more pressing, not just for its shareholders but for an entire industry that needs consolidation if it's to weather the coming storm of underwhelming growth and missed expectations.
Sealing this transaction would send a signal to the markets that deals can happen. An even rosier scenario would be a bidding war led by ASM that is eventually won by a deep-pocketed Chinese buyer, and which gets the blessing of governments the world over. But we can dream.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Hitachi Kokusai was formed through a three-way merger in 2000. Its stock is close to the 1997 high of its pre-merger incarnation
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Tim Culpan in Taipei at firstname.lastname@example.org
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