WASHINGTON -- ASM Lithography's planned $1.6 billion purchase of Silicon Valley Group Inc. will give the Dutch tool supplier a dominant position in the next three generations of wafer-exposure technologies, said analysts, reacting to Monday's acquisition announcement.

ASML officials in Veldhoven, the Netherlands, said the acquisition will be made with a stock swap and is expected to be completed in the first half of 2001, making the company the world's largest supplier of semiconductor lithography systems (see Oct. 2 story). But estimates from VLSI Research Inc. in San Jose already show ASML taking the lead in lithography shipments with a 36% market share in exposure tools last year.

Nikon Corp. of Japan--the long-time leader in wafer-fab photolithography systems--slipped to second place in 1999 with a 34% share in tool sales, according to the San Jose-based market research firm. Canon Inc. was third with a 17% share in 1999, said VLSI Research.

SVG Lithography's 9% market share will push ASML far ahead of rival Nikon, said analyst Risto Puhakka, vice president of operations at VLSI Research.

However, it remains to be seen just how ASML's merger will combine the two lithography operations. In making the acquisition announcement Doug Dunn, chief executive officer of ASML, described the acquisition as an "excellent strategic fit with little overlap." Dunn added that a key element in the transaction will be blending SVG's intellectual property and expertise with those of ASML.

The transaction will also have to pass regulatory reviews by government agencies, and it will toss the spotlight on the fact that SVG is the only major U.S.-based supplier of lithography systems in a field that's dominated by Nikon and Canon of Japan and ASML in Europe.

Puhakka said he believes ASML's lithography operations and SVGL will be kept separate for some time since Silicon Valley Group's tools use an entirely different reflective catadioptic lens technology compared to ASML's refractive technique. Also the analyst said he thinks ASML's production lines in Veldhoven are now running nearly at maximum capacity, and the Dutch firm could not shift SVGL output to its European operation even if it wanted to.

With the acquisition, ASML will gain SVG Lithography's 193-nm, 157-nm, and Extreme Ultraviolet (EUV) tool operations to augment its own systems technology. The acquisition will give ASML new photoresist track products and technologies from SVG as well as a thermal systems operation that offers oxidation, diffusion and low-pressure chemical vapordeposition (CVD) tools as well as atmospheric pressure CVD systems.

The photoresist track systems will match up well with ASML's photomask operation, which was acquired last year. It wasn't immediately clear how SVG's thermal and disposition operations will fit into ASML's lithography emphasis, said some industry observers.

The acquisition would also clear up one lagging commitment that ASML made to U.S. government while gaining approval to join the Extreme Ultra Violet LLC development program, which is receiving federal assistance and access to national laboratories. The Dutch firm agreed to open a major production operation in the United States in return for being allowed to join the U.S.-based EUV project as a foreign participant. SVGL will greatly expand ASML's operations in the United States.

ASML's foreign control of the leading-edge U.S. lithography company could also stir up the old fears of technology loss in the United States. Those concerns resulted in SVG acquiring the old Perkin Elmer Micrascan operation in the late 1980s. Perkin-Elmer wanted to shed the money-losing division, and U.S. semiconductor executives worked hard to find an American buyer.

When SVG itself ran into financial difficulties with its own lithography efforts in the mid-90s, a deal was struck to transfer technology to Canon in return for capital and royalties on Canon equipment sales in the Japanese market. Canon then put stringent demands on the deal that caused SVGL to reject the entire arrangement.

ASML brings to SVGL a ready source of cash. The capital is needed to added capacity behind SVGL's Micrascan IV 193-nm scanner and Micrascan V 157-nm system. Observers said the merger also should help SVGL's chances in replacing Nikon as the supplier of critical-layer systems at Intel Corp. The microprocessor giant has placed a $100 million order for SVGL 193-nm scanners and is the market for additional systems.

Ironically, the acquisition comes only weeks after SVGL made its first penetration in Taiwan, selling its 157-nm pilot scanner to Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), where ASML has had a solid phalanx up to now.

SVG plans to hold a press conference in California late on Tuesday afternoon to discuss the pending sale. "This is a great deal for our customers, employees, suppliers and shareholders," said Papken Der Torossian, chief executive officer of SVG in San Jose. "By teaming with ASML, SVG gains the breadth and scope necessary to achieve economies of scale, optimize the efficiency of its manufacturing facilities, expand its product innovation efforts and provide professional growth opportunities for employees," said the CEO in a statement issued on Monday when the sale was announced.