VSEA Varian Semiconductor (MM)

Applied Materials (AMAT) has announced that the company’s board of directors unanimously approved the acquisition of  Varian Semiconductor (VSEA) for $63 per share in cash. Varian’s board of directors has also approved the acquisition.

Varian will operate as a separate business unit and its results will be reported under Applied’s Silicon Systems Group.

The definitive agreement is subject to normal regulatory approval. The break-up fee in case Varian backs out will be $147 million. On the other hand, if Applied backs out, it will have to pay Varian $200 million.

Applied intends to fund the acquisition with available cash on its balance sheet and raise such further amount of debt as may be required. JPMorgan Chase Bank (JPM), Citigroup Global Markets Inc (C) and Morgan Stanley Senior Funding Inc (MS) have committed to a one-year bridge loan facility if required.

Applied also has a billion dollars available under a revolving credit facility, which it could replace with another to extend the maturity period. Moody’s Investors Service, a division of  Moody’s Corp (MCO) stated that this would not affect Applied’s A3 long-term credit rating.

What is Applied Thinking?

Quite simply, the company is acquiring a leadership position in an important segment of the equipment market. Varian is a pioneer and leader in the ion-implant segment, having gained significant market share over the last few years. Applied did have an ion-implant business before, but competitive pressures forced it to bow out back in 2008. This is a very good way to jump right back in.

Ion-implant technology is growing in importance and BCC Research expects that the market will grow at a CAGR of 10.1% to reach $4.4 billion by 2013. Applied’s acquisition of Varian at this point will enable it to partake of this growth.

The fact that the acquisition makes Applied the leading supplier of semiconductor equipment in all except the lithography segment is also something to consider. Varian’s customer base includes the likes of Intel Corp (INTC), Globalfoundries and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), some of which are already Applied customers.

Varian brings on board attractive solar equipment. The company’s Solion ion implant tool enables significant cost and production efficiencies. Considering the severe pricing pressure in the solar cell market and the efficiencies provided by Solion, the product should be extremely popular among solar cell manufacturers. In fact, Varian already has a few satisfied customers that have proclaimed Solion’s effectiveness, so demand for the product should be better than Varian’s original projections for 2011 and 2012.

Applied’s own solar business has been struggling for some time due to dynamics in the thin film market, and its decision to focus on the crystalline business instead is proving to be the correct strategy. However, solar is a fast-growing and less cyclical industry than semiconductors and having a more comprehensive portfolio will continue to help Applied as the market develops further.

And this is not all. Applied expects the acquisition to be accretive in the first full year of operation. Moreover, cost synergies are expected to be $50-60 million within the second year of operation.

Conclusion

While some may view the acquisition as expensive, we think it is worth the money, considering the advantages obtained. Additionally, the pricing is high enough to make counter-bidding difficult, which is a positive in our opinion.

We expect estimates for 2011 and 2012 to go up to reflect the addition of Varian’s business.

The Zacks Rank for Applied shares is currently #3, which implies a Hold rating in the short term (1-3 months).

 
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