Updated: Regulatory issues plague M&A activity in fab tool business.
After a series of delays due to regulatory issues, Lam Research and KLA-Tencor have agreed to terminate their proposed merger agreement.
Last year, Lam entered into a definitive agreement to acquire KLA-Tencor for about $10.6 billion. Lam’s proposed and blockbuster move to acquire KLA-Tencor would supposedly create the world’s second largest fab tool maker, behind Applied Materials.
Originally, the transaction was supposed to be completed by mid-2016. But the deal has been delayed several times amid regulatory issues in China, the United States and elsewhere.
By August 2016, though, Lam said it was still in discussions with the U.S. Department of Justice (DOJ) as well as regulatory agencies in Korea, Japan and China.
At that time, Lam’s proposed deal with KLA-Tencor became problematic. Lam is a major supplier of deposition, etch and related tools. For its part, KLA-Tencor is the world’s largest supplier of process control systems, such as inspection and metrology.
There is little product overlap between the two companies, although the DOJ apparently raised concerns for more curious reasons during that time. “We suspect that there is concern by the DOJ that Lam could restrict the sale of KLA-Tencor equipment to only customers who buy process equipment from Lam. While Lam has expressly stated that this will not be the case, the DOJ likely wants to see this supervised under a consent decree,” said Weston Twigg, an analyst at Pacific Crest Securities, in a research note in August.
Now, after review of recent antitrust agency feedback, Lam and KLA-Tencor decided that it is not in the best interest of their respective shareholders to continue pursuing the merger. In accordance with terms set forth in the merger agreement, no termination fees will be payable by either company.
“The decision to mutually terminate our agreement came after the DOJ informed the two companies that it is suspending the consent decree negotiations related to the proposed transaction,” said Martin Anstice, president and chief executive of Lam, in a conference call.
“We believe that this proposed combination would have resulted in compelling benefits for our customers, employees and stockholders, as well as accelerate innovation in the broader semiconductor industry, so we are disappointed with the outcome,” Anstice said.
Rick Wallace, president and chief executive of KLA-Tencor, added: “Although we are disappointed with this outcome, KLA-Tencor’s performance over the past several quarters demonstrates the company is executing our strategies at a high level and creating compelling value for the industry and for our stockholders.”
Besides the Lam-KLA deal, the DOJ and others blocked another major mega-merger in the arena. Last year, Applied Materials’ proposed acquisition of Tokyo Electron Ltd. (TEL) was terminated due to regulatory issues.
Still other major deals are pending. Looking to expand into new markets, ASML Holding in July entered into an agreement to acquire e-beam wafer inspection specialist Hermes Microvision (HMI) in a cash transaction valued at 2.75 billion euros (US$3.08 billion).
The DOJ and others have raised concerns about the mega-mergers in the fab tool industry amid a number of changes in landscape. Several years ago, each product segment in this sector had a number of competitors. At one time, chipmakers had several product choices in each segment.
But amid the consolidation in the IC industry, fab tool vendors began to consolidate at a rapid pace. Today, there are fewer players in each product segment. This, in turn, gives chipmakers fewer choices and reduces their buying power. And in many respects, it arguably creates a less competitive landscape.
The recent and proposed mega-mergers exacerbate the problem. “Once again, the U.S. Department of Justice created terms too onerous to reasonably meet, in our view, resulting in the cancellation of the second major attempted semiconductor equipment merger in two years. The Applied Materials/Tokyo Electron merger met a similar fate,” said Pacific Crest’s Twigg in a research note this week.
There is good and bad news for both parties. “The termination of the merger removes execution risk related to the deal, in our view, and likely keeps Lam better positioned for strong near-term 3D NAND spending,” Twigg said. “We view this as neutral to slightly negative for KLAC. There’s a bull case that can be made for KLA-Tencor, which centers on its high margin profile, new inspection products, and the 10/7nm logic and foundry ramps.”
Here’s the bad news for Lam, KLA-Tencor and other fab tool vendors: “However, we have concerns related to the scale and timing of TSMC’s 10nm and 7nm ramps, with a potential demand pause developing in the near term (after 10nm, before 7nm),” he said. “We also see leading-edge logic and foundry nodes stretching out between node transitions and ramping to smaller wafer volumes, which could be a long-term headwind given KLA-Tencor traditionally has high exposure here (we model foundry capex flat and logic capex up 1% in 2017).
“We also believe there has been an engineering exodus from KLA-Tencor and that the company may be a half-step behind where it was when it entered the merger agreement, which is why the deal termination might be slightly negative. That said, KLA-Tencor remains a very good company, and we could change our view to the positive if demand proves healthy,” he said.