The Week In Review: Manufacturing

Lam to buy KLA-Tencor; Applied forms R&D lab; Intel converts China fab; WD acquires SanDisk.

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In a major and surprising move in the fab tool business, Lam Research has entered into a definitive agreement to acquire KLA-Tencor for about $10.6 billion in cash and stock.

“Lam Research and KLA-Tencor have been working to tie together process and process control in an effort to expand process windows and better enable complex production steps, like multi-patterning. This acquisition formalizes their efforts and potentially improves the tie-in. Whether the company can meet its goals of expanding its market opportunity to 45% of WFE from 42% by 2018 and $600 million in revenue synergies by 2020 will depend on how well Lam executes and how Applied Materials responds,” said Weston Twigg, an analyst with Pacific Crest Securities, in a report.

“This deal adds long-term risk to AMAT, short-term opportunity. Over the long run, Applied Materials may have difficulty responding to a combined LRCX/KLAC, and will likely need to acquire smaller process control companies (NANO, NVMI, RTEC, FEIC and Hermes Microvision are all candidates). In the short term, we believe the deal may remove some customer goodwill that Lam Research built during the AMAT/TEL merger process, because LRCX now becomes another 800 lb. gorilla,” Twigg said. “Nanometrics becomes a more likely acquisition target, but standalone risk increases. In the near term, we see little risk, as Nanometrics’ recent market share wins are already established. We believe the merger also increases the likelihood that Applied Materials will buy Nanometrics to emulate the LRCX/KLAC value pitch.”

Lam Research also announced its financial results for the quarter ended Sept. 27. Revenues were $1.6 billion, up 8% from the prior quarter.

KLA-Tencor announced operating results for its first quarter of fiscal year 2016, which ended on Sept. 30. It reported GAAP net income of $105 million and GAAP earnings per diluted share of $0.66 on revenues of $643 million.

Applied Materials plans to establish a new R&D laboratory in Singapore in collaboration with A*STAR. The S$150 million joint investment will focus on developing advanced IC technology. The lab will be housed within A*STAR’s new R&D cluster at Fusionopolis Two. It will feature a 400-square-meter Class 1 cleanroom with state-of-the-art semiconductor process equipment. The facility will be staffed by 60 researchers and scientists.

SEMI completed its annual silicon shipment forecast for the semiconductor industry. Total wafer shipments this year are expected to exceed the market high set in 2014 and are forecast to continue shipping at record levels in 2016 and 2017.

Intel announced that its China fab will be converted from the production of 65nm chipsets to 3D NAND and 3D XPoint chips over the next few years. It expects to begin selling 3D NAND products from this fab in the second half of 2016. Intel plans to invest $5.5 billion in the Dalian-based fab.

“Intel’s memory expansion into China should be good for capex and equipment companies,” according to a report from Pacific Crest Securities. “We believe Applied Materials, Lam Research and Nanometrics have good exposure to Intel’s memory spending, and we would be buyers. Intel has already suggested that its capex will be higher in 2016, and the conversion of its Dalian, China, fab to non-volatile memory should help support this. Still, we expect the ramp to be slow, with perhaps 10,000 to 15,000 wafer starts per month (worth around $650 million to $975 million) in place by the end of 2016. Bigger picture: Intel’s 3D NAND and eventual XPoint efforts should keep competitive pressure on Samsung and others to speed conversion to 3D NAND, which could support NAND capex growth in 2016; we model NAND capex up 7% y/y, and feel more confident about this number with Intel’s move.”

Western Digital and SanDisk have entered into a definitive agreement under which Western Digital will acquire all of the outstanding shares of SanDisk for a combination of cash and stock. The offer values SanDisk common stock at $86.50 per share or a total equity value of approximately $19 billion.

Microsemi has submitted an offer to acquire PMC-Sierra. Microsemi could end up in a bidding war with Skyworks, which also moved to acquire PMC-Sierra.