Chip Merger Pace Rises With Western Digital, Lam Deals

Updated on
  • Lam to buy KLA-Tencor in $10.6 billion machinery combination
  • Western Digital to acquire SanDisk for about $19 Billion

The merger wave sweeping the computer-chip industry is now engulfing the makers of the machines needed to crank out semiconductors.

Lam Research Corp. said Wednesday that it would buy KLA-Tencor Corp. for $10.6 billion in cash and stock. Within four hours, Western Digital Corp. announced a deal to acquire SanDisk Corp. for about $19 billion. The pacts added to what was already a record year for chip deals -- a total of $76 billion before Wednesday.

With half of the spending on the manufacturing equipment coming from just three chipmakers -- Samsung Electronics Co., Taiwan Semiconductor Manufacturing Co. and Intel Corp. -- suppliers of the gear need to pool resources to keep up with the increasing pace of spending on research and development. That consolidation mirrors what’s happening in chips, where companies such as Broadcom Inc. and Avago Technologies Ltd are getting together in part because there are fewer phone makers to buy parts.

“We knew that consolidation was going to happen and that scale was going to matter long term,” Western Digital Chief Executive Officer Steve Milligan said in an interview. “Scale matters. Having a broad set of resources matters.”

The NAND flash memory that Western Digital will get from SanDisk is a growing part of storage in the biggest data centers. Highlighting the industry’s recent upheaval, Dell Inc. and EMC Corp., two of the biggest makers of computer and storage systems for corporations, last week announced the largest ever technology industry merger. Those merger partners use drives from suppliers like Western Digital.

China Factor

“You need to consolidate in order to compete,” said Daniel Amir, an analyst at Ladenburg Thalmann & Co, who predicted that China’s drive to get more chip capabilities will result in more deals. “I think it’s going to continue.”

Western Digital will pay $86.50 a share in cash and stock for SanDisk. That represents a 15 percent premium to SanDisk’s closing price on Tuesday in New York. SanDisk rose 2.1 percent to $76.78 at the close Wednesday in New York, reaching its highest price since March. Western Digital fell 4.6 percent to $71.44.

“WD had two potential paths. One, they could have remained conservative and bought back a ton of stock,” said Joe Wittine, an analyst at Longbow Research. “They made the more aggressive play.”

That aggression was born of necessity.

Sales Decline

Western had a leading 44 percent slice of the market for hard-disk drives in 2014 but suffered a sales decline of 4 percent in its most recent financial year as the total disk-drive business shrank to $32.9 billion, according to figures from IDC Corp. The market for NAND flash chips -- where SanDisk and partner Toshiba Corp. together were the largest producer -- rose to $28.9 billion in 2014.

Now the conversation shifts to Seagate Technology Plc, which also makes hard-disk drives, Wittine said. 

“Stay the course and generate cash and buyback a ton of stock or do they explore strategic optionality?” he asked.

Lam’s offer for KLA-Tencor, meanwhile, was 24 percent higher than the target’s closing price on Tuesday.

Their combination would have big chunk of a growing industry. The new company would have $8.7 billion in annual sales and serve 42 percent of the wafer-fabrication market, the companies said. The global market for chip-manufacturing equipment, including used machines, will climb 5 percent this year to $37 billion, industry organization SEMI forecast last month.

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.

Innovation ‘Roadblock’?

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 said.

Lam said in a statement that it expected to receive regulatory approval “on a timely basis,” in part citing “complementary product lines,” and projected the deal would close in the middle of next year.

KLA 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. KLA-Tencor’s shares rose 19 percent to $63.98, marking their biggest one-day gain since January 2001. Lam rose 1.1 percent to $70.79.

Lam forecast $250 million in annualized cost savings in 18 to 24 months of closing the deal and about $600 million in additional annual revenue by 2020.

Current Lam Chief Executive Officer Martin Anstice will lead the new Lam Research Corp., as it will be known. The statement didn’t address the future role of KLA-Tencor CEO Rick Wallace.