Fab Tool M&A Slowdown?

The semiconductor industry is in the midst of a dizzying array of mergers and acquisitions. At the current pace, some 32% of all U.S. publicly traded semiconductor companies are projected to get acquired in 2015, according to FBR. But in reality, the M&A activity will slow and edge towards a 15% consolidation rate for the year, according to the firm.

Still, the IC industry is bracing for the next mega-merger. But it’s a different story in the semiconductor equipment sector. “The era of mega-mergers is over in the equipment side,” said Risto Puhakka, president of VLSI Research.

At one time, though, the fab tool market was ripe for mega-mergers. Fab tool vendors were looking to scale as a means to broaden their offerings. The best example of this trend was Lam Research’s blockbuster acquisition of Novellus in 2011.

In another example, Applied Materials in 2013 announced a definitive agreement to acquire Tokyo Electron Ltd. (TEL) for around $9.3 billion. But the blockbuster deal was recently scrapped amid a host of complicated regulatory issues.

After numerous delays, it was no surprise the deal was scrapped. But what surprised the industry is that one entity, the U.S. Department of Justice (DOJ), stepped in and blocked the deal. Until then, the fab tool sector was under Washington’s radar despite the consolidation in the industry. “Lam-Novellus was a slam dunk,” Puhakka said. “It took six months to close.”

Not long ago, there was a belief that the Applied-TEL deal was on a similar fast track. Now, however, it appears that Washington is changing its tune. “There was a tremendous shift how the (Applied-TEL) merger was viewed at the DOJ. No one saw that coming. In the DOJ’s view, (the combined Applied-TEL entity) would become too large in the overall wafer fab equipment market,” he said.

Perhaps the DOJ is taking a harder looks at semis. Or, perhaps Intel also stepped in and raised some concerns about the Applied-TEL deal with the DOJ. After all, Intel and other chipmakers want more tool vendors in the market. This gives IDMs and foundries more and different options, as well as pricing power.

In any case, the Applied-TEL episode has caused the equipment industry to pause. Now, fab tool vendors are thinking twice before making an acquisition, large or small. “Given what happened at the DOJ, people will need to re-assess how mergers will be done,” Puhakka said.

For that reason and others, the M&A activity will likely slow, or grind to a halt, in the equipment sector, at least for the remainder of 2015. But then, in 2016, it might be a different story. M&A activity will likely heat up again and fab tool vendors will look for acquisitions to beef up their product portfolios.

In fact, there are several possible takeover targets, mostly small- to mid-sized companies. The candidates include Mattson, Nanometrics and Rudolph, according to various analysts. One larger player, DNS, could also be in play, they added.

But unlike the semiconductor market, don’t look for a big blockbuster, or mega-merger, in the fab tool sector, at least in the near term. With the Applied-TEL episode fresh in the minds of corporate boardrooms, it’s a path that will likely be avoided.