SAN JOSE, Calif. – In striking down a proposed $10.6 billion deal to merge Lam Research and KLA-Tencor, regulators sent chip makers a message that they will have to rely on vendor collaboration to optimize next-generation processes. The ruling is expected to put a chill on any other larger merger deals in the capital equipment sector despite an historic period of consolidation in the maturing semiconductor industry overall.
The deal struck nearly a year ago aimed to create a company with a unique ability to make and measure the process of building chips. While multiple companies compete in the deposition and etch systems Lam supplies, KLA maintains a dominant market share in metrology regulators said would not be fair to combine with any one of them.
“KLA-Tencor's leading position in several metrology and inspection markets could have created the potential for Lam Research to foreclose its competitors by reducing their timely access to key KLA-Tencor equipment and related services,” said the U.S. Department of Justice in a press statement explaining its decision. “Metrology and inspection technologies are growing increasingly important to the successful development of semiconductor fabrication equipment and process technology,” it added.
U.S regulators cooperated with counterparts in China, Korea and Japan on the investigation. The LAM/KLA decision came in the wake of a proposed merger of Applied Materials and Tokyo Electron which regulators also nixed.
The Lam/KLA decision is “a warning shot across the bow of other potential deals that it’s not just horizontal but vertical customer overlap that matters -- zero product overlap just doesn't get automatic approval,” said market watcher Robert Maire of Semiconductor Advisors LLC in an email newsletter. “It’s highly unlikely that anyone in the semiconductor equipment space will attempt another large deal given these last two attempts ended in failure,” he added.
The decision also likely ensures that for the foreseeable future, Applied Materials will retain its traditional position as the top capital equipment supplier.
In conference calls after the decision was announced, both companies made the case that that industry drivers will propel their growth as stand-alone companies. Analysts said KLA clearly has the strongest outlook with its greater than 50% and growing share of the process-control market. They speculated Lam will explore longer term possibilities for growth in adjacent markets.
Lam estimated the combination would have spawned integrated product opportunities valued at $600 million a year. “We aspire to deliver as much of our vision as possible [through collaboration] but all of it is not possible,” said Martin Anstice, chief executive of Lam in a conference call today.
“We are frustrated, the combination of process and process control would have accelerated innovation in the industry,” said Rick Wallace, KLA’s chief executive on a separate call.
Long term, Wallace said he expects KLA to grow revenues at 5-7% a year, significantly above the 2-4% growth expected for the semiconductor industry as a whole. Wallace does not expect any other offers given only two other capital equipment companies have they money for such a deal and unlike Lam they have overlapping process-control products, he added.
Wallace downplayed ASML’s $3.1 billion acquisition announced in June of e-beam inspection specialist Hermes. The deal will support ASML’s plans to introduce extreme ultraviolet lithography, but KLA’s optical inspection systems have 100 to 1,000 times faster throughput than e-beam, he noted.
KLA will have “a much easier time coming out of this broken deal over the next few years than Lam does as [KLA has] less ongoing competition than Lam,” Maire said. The ruling “leaves Applied as the only significant company with strong positions in both process and inspection/metrology, though it is still far from being in KLA's league,” he added.
Indeed, Applied Materials is a distant third in the process-control market to KLA and Hitachi, according to figures KLA showed on its call.
Both Lam and KLA said market prospects are strong for capital spending. Foundries are ramping 10 and 7nm nodes that will require double and triple patterning, and memory chip makers are gearing up more dense 3D NAND chips and new memories such as 3D XPoint.
The downside for both companies is they will now have to refocus their teams and collaborate with a broader set competitors.
“There was obviously a lot of shuffling of personnel planned, with some expected departures and some coming out on top,” said Maire. “There will likely be a different set of departures and reshuffling without the deal,” he added.
— Rick Merritt, Silicon Valley Bureau Chief, EE Times