Lam to Buy KLA-Tencor in $10.6 Billion Chip Machinery Deal

  • Merger creates equipment company with $8.7 billion in sales
  • Pact comes 6 months after antitrust ended another merger

Lam Research Corp. agreed to acquire KLA-Tencor Corp. in a $10.6 billion cash-and-stock deal, testing regulators six months after a smaller merger between chip-equipment suppliers was halted over antitrust concerns.

KLA-Tencor shareholders can elect to receive $32 in cash and 0.5 of a Lam Research common share, in all-cash, all-stock, or a combination, according to a statement Wednesday. The offer values KLA-Tencor at about $67.02 a share, or 24 percent more than the stock’s closing price on Tuesday in New York.

KLA-Tencor’s shares rose 23 percent to $66.40 at 9:37 a.m. Wednesday in New York, marking their biggest intraday gain since January 2001. Lam rose 8.9 percent to $76.23.

The announcement takes total semiconductor deals announced in the past year to almost $95 billion as rising costs drive chipmakers and their suppliers to consolidate amid slowing demand for PCs, smartphones and servers. Intel Corp. and Taiwan Semiconductor Manufacturing Co. last week announced they’re cutting spending this year, citing weakness in the industry.

The global market for chip-manufacturing equipment, including used machines, will climb 5 percent this year to 37 percent billion, industry organization SEMI forecast last month. 

A combined Lam-KLA entity would have $8.7 billion in annual sales, serve 42 percent of the wafer fabrication market, and realize $250 million in annualized cost savings in 18 to 24 months of closing the deal, the companies said. The deal is expected to close in mid-2016 with Lam Research saying it sees about $600 million in additional annual revenue by 2020 from the combination.

CEO Succession

Current Lam Chief Executive Officer Martin Anstice will lead the new Lam Research Corp., as it will be known, with a team from both companies, according to the statement. Lam Chairman Steve Newberry will continue in that position. The statement didn’t address the future role of KLA-Tencor CEO Rick Wallace.

Wallace could be eligible to receive about $33 million if he is terminated after the deal or if he voluntarily resigns because of a demotion, according to Bloomberg calculations based on KLA-Tencor’s proxy statement. That includes $7 million in cash, dividend equivalents of $4.88 million and equity of about $21 million, based on the buyer’s offer price. Wallace would receive an excise tax gross-up payment should the tax be imposed on his golden parachute.

The acquisition would top Lam’s 2011 takeover of Novellus Systems Inc. for about $3.3 billion and be larger than Applied Materials Inc.’s proposed $9.4 billion bid for Tokyo Electron Ltd. announced two years ago. Proposed remedies to limit antitrust issues, which weren’t outlined, failed to resolve the U.S. Justice Department competitive concerns over the merger of Applied Materials and Tokyo Electron, the agency said in April when the deal was canceled after 580 days.

Regulatory Approval

While consolidation cuts the number of suppliers of expensive equipment needed to make cutting-edge chips, customers haven’t always opposed the moves. TSMC in Oct. 2013 favored Applied Material’s proposed purchase of Tokyo Electron, saying that “synergistic benefits” could be a good thing because R&D costs are rising. TSMC spokeswoman Elizabeth Sun didn’t immediately answer calls Wednesday seeking comment on the Lam-KLA merger.

While calling Lam’s acquisition “a great deal,” Patrick Ho, an analyst at Stifel Nicolaus & Co., said the big concern is whether “will regulators see this combination as a roadblock to ‘innovation.”’

“Will customers be willing to accept such a large entity that not only supplies on the process end (i.e., etch and deposition with Lam), but also the inspection and monitoring side (KLA’s process control),” he wrote in a note to investors

Lam Research said it expected to receive regulatory approval “on a timely basis,” in part citing “complementary product lines.”

Deal Funding

The company, based in Fremont, California, said it will fund the cash consideration and repayment of KLA-Tencor’s outstanding term loan with about $1.9 billion of cash on hand from the two companies and approximately $3.9 billion in debt financing.

At $10.6 billion, the offer is 28.9 times Milpitas, California-based KLA-Tencor’s 2015 full-year net income, compared with a median of 32.7 for 22 deals tracked by Bloomberg in the past year.

Before it's here, it's on the Bloomberg Terminal.