-- Lam, Novellus deal proposal boosts trading in semiconductor
capital equipment stocks
-- Follows similar move in May by Applied Materials deal with
Varian Semiconductor
-- News boosts Philadelphia Semiconductor Index
By Dan Gallagher
The proposed $3.3 billion combination of Lam Research Corp.
(LRCX) and Novellus Systems Inc. (NVLS) boosted trading on other
stocks in the semiconductor capital equipment arena Thursday, as
some analysts speculated of further deals in the segment.
Late Wednesday, Lam Research (LRCX) announced plans to acquire
Novellus Systems (NVLS) in an all-stock transaction worth about
$3.3 billion.
The deal follows a similar move in May by sector leader Applied
Materials Inc. (AMAT), which signed a deal to buy Varian
Semiconductor for $4.9 billion in cash.
The Lam-Novellus deal represented a 28% premium for Novellus
over its most-recent closing price, for a stock that had already
run up more than 30% in the last few months. Other stocks in the
semicap space got a boost on Thursday from the news, helping the
Philadelphia Semiconductor Index to rise as much as 2% in early
trades.
"In terms of implications, we believe that this deal could spark
another wave of deal-making for the space," wrote Patrick Ho of
Stifel Nicolaus.
The deal leaves KLA-Tencor Corp. (KLAC) as one of the few
large-cap names in the space that has not undertaken a major deal.
The stock was last trading up 1% at $46.70, and is up about 17%
since early October.
Ho named other, smaller firms as potential deal targets,
including Nanometrics Inc. (NANO) , Rudolph Technologies Inc.
(RTEC) and Nova Measuring Instruments Ltd. (NVMI, NVMI.TV).
Nanometrics and Nova shares were up last 4% and 3%, respectively,
while Rudolph maintained fractional gains.
"We believe that many of these companies serve niches that can
be integrated easily within a larger entity [or combined with one
of similar size]," Ho wrote. "Additionally, there are many more
private companies in the process control space with unique and
different technologies that could be better leveraged as part of a
larger company."
James Covello of Goldman Sachs wrote in a note that he believes
"the consolidation in [the semicap space] will help the industry to
deal with an increasingly concentrated customer base and growing
R&D requirements." Those costs for research and development are
rising "as equipment companies need to support a variety of 3D chip
initiatives and also invest for the 450mm wafer transition," he
noted.
But, Covello added that he believes "additional large-scale
M&A" in the segment is unlikely.
"A deal for Novellus had been debated for several years in the
industry and was a possibility we discussed this year," he wrote.
"Between this deal and other acquisitions over the last five years,
there are now just two main tool providers for most products."
Weston Twigg of Pacific Crest said the Lam-Novellus deal "should
increase investor interest in the group as a whole," given growing
demand for electronics products, especially ones that use NAND
flash memory such as smartphones and tablets.
"With Applied Materials' recent acquisition of Varian and now
Lam's acquisition of Novellus, we are in a period of
consolidation," Twigg wrote. "Most semiconductor equipment
companies now have very profitable models with high cash
generation; share buybacks and dividends are increasing, and
additional consolidation is a likely outcome."
However, Twigg shied away from naming potential buyout targets,
recommending that investors "focus simply on companies with strong
product cycles and good execution, such as ASML [Holding NV (ASML,
ASML.AE)] and KLA-Tencor."
-By Dan Gallagher; 415-439-6400; AskNewswires@dowjones.com