SAN FRANCISCO—Lam Research Corp. said Wednesday (Dec. 14) it would acquire rival semiconductor capital equipment maker Novellus Systems Corp. in an all-stock deal valued at about $3.3 billion.
Rumors about a possible Lam-Novellus deal have been circulating for years. The companies strengths within the capital equipment market are complementary, with Lam being especially strong in etch systems and cleaning tools and Novellus in surface preparation and deposition technologies. According to Risto Puhakka, president of VLSI Research Inc., the two companies have virtually no products that compete head-to-head.
"It's a good fit," Puhakka said. "It's two really good companies getting together. It was just time to happen."
"It's hard to believe that after 18 years the big bang has finally happened," said Richard Hill, chairman and CEO of Novellus. "This merger is not a synergistic transaction but rather a seismic transaction. We're combining the Park Place and Boardwalk of the semiconductor capital equipment industry."
According to Puhakka, the timing of the deal is consistent with consolidation trends that have emerged over the past couple of years. "The playing field is narrowing down to two key suppliers for each [equipment] segment," Puhakka said. "This makes sense because Lam becomes a lot larger and gets huge economies of scale."
Lam, the No. 4 vendor in semiconductor equipment by sales in 2010, is likely to solidify its hold on that spot but unlikely to move higher in the vendor rankings. The combined revenue of Lam and Novellus in 2010 was about $3.55 billion. The top three vendors—Applied Materials Inc., ASML Holding NV and Tokyo Electron Corp.—had revenues of $5.95 billion, $5.04 billion and $4.12 billion, respectively, in 2010, according to VLSI.
Puhakka said the deal might boost Lam's chances of doing more business with No. 1 semiconductor supplier Intel Corp., a longtime Novellus customer. Despite being the No. 1 vendor in etch systems, Lam has famously been unable to crack the Intel account with its etchers, he said.
Puhakka and other analysts generally applauded the deal. "While [Lam] shares may come under pressure near-term given the all-stock bid, we like this transaction as we believe it sets the path for meaningful share gains as increasingly more complex semiconductor manufacturing benefits from the combination of the best of breed tools from [Lam and Novellus]," said CJ Muse, an analyst at Barclays Capital. Muse said the combinations would be highly complimentary from a customer perspective, with Lam strong at foundry and emory customers, while Novellus is a significant supplier to Intel.
"This combination makes sound business sense given our cultures similarities, technology adjacncy and complementary customer and supplier base," said Steve Newberry, Lam's vice chairman and CEO.
Under the terms of the agreement, Novellus stockholders will receive 1.125 shares of Lam Research common stock for each share of Novellus that they own, in a tax-free exchange, Lam said. Based on the closing price of Lam's stock Wednesday, the transaction values Novellus at a price of $44.42 per common share. Novellus' stock price closed at $34.70 Wednesday, prior to the acquisition announcement, making Lam's offer a 28 percent price premium over the stock's value.
Martin Anstice, who is set to become Lam's CEO on Jan. 1, will remain CEO of the combined company, Lam said. Timothy Archer, chief operating officer at Novellus, will become chief operating officer of the combined company, Lam said. Ernest Maddock, Lam's chief financial officer, will remain chief financial officer, Lam said. The board of directors of Lam will add four new directors jointly nominated by Lam and Novellus, Lam said.
Hill said he would be stepping aside from the combined company at the close of the merger, suggesting that he would retire.
Upon closing, Lam and Novellus stockholders will own approximately 59 percent and 41 percent, respectively, of the combined company, Lam said.
Lam said it expects total cost synergies between the two companies to be worth about $100 million per year. The firm said the combined company would be positioned to grow faster than either company could achieve individually through advancing technical benefits from owning adjacent technologies, optimizing and accelerating collective development of next-generation tools and further developing complementary customer relationships.
Lam also announced a $1.6 billion common stock repurchase program, which replaces its existing share repurchase program.