Inside Japan: The Applied Materials-Tokyo Electron Merger

Analysis: What’s behind the deal. Was it really “now or never?”


The merger of Tokyo Electron and Applied Materials has turned heads around the globe, but behind the scenes in Japan there was a recognition that this deal had to be done now or it would never be possible.

Releases from both companies describe it as a merger of equals, and the Japanese press has reported it that way. But international media outside of Japan take the view that Tokyo Electron will absorbed by the Applied.


Figure 1: Financial achievement of Tokyo Electron (top) and Applied Materials (bottom).

So what’s really going on? Let’s consider the financials of each company over the past past few years. Figure 1 is based on the data found on the website of investor relations of both companies. Tokyo Electron has continued growing, benefiting from active equipment investment not only of Japanese semiconductor companies, but also TSMC as well as the Korean giant company, Samsung. However, this growth bottomed out after the Lehman Shock. Applied grew steadily up until the Lehman Shock, as well. And both companies experienced deficits in 2009. This ended shortly, with both companies reporting a surplus the next year.

There is a difference in the earning trends of each company after the Lehman Shock, though. Despite of the recovery of Tokyo Electron after the Lehman Shock, its earnings never achieved the same level of earnings prior to before the Lehman Shock. Applied, on the other hand, grew to the point where it set a new earnings record in 2011.

It is widely believed that Japanese equipment manufacturers, including Tokyo Electron, are heavily supported by the process engineers of the semiconductor makers. Semiconductor makers focus mainly on the process development, while the equipment manufacturers embody the idea of further manufacturing improvement. In other words, the equipment manufacturers draw the development together with the domestic semiconductor makers. However, the decline of the domestic Japanese electronics industry continued after the Lehman Shock, making it hard to outperform the highest benchmark achieved before the Lehman Shock (Figure 2).

Figure 2: Revenue of the consumer electronics industry. The unit of the vertical axis is thousand yen. Source: Plotted based on JEITA `s total from January to July each years.

The domestic semiconductor makers have scaled down their manufacturing operations, opting instead for a “fab-lite” strategy. Many process engineers have quit their jobs. As a result, Tokyo Electron has to carry out the process development by itself. Its president and executive chairman, Tetsuro Higashi, said at a press conference that as the development costs increase rapidly, handling everything by a single company is getting out of hand.

The financial decline of Tokyo Electron is actually not as bad compared as the rest of the Japanese electronics industry, but the trend is certainly similar. It is best to view it in the context of the overall electronics industry, which is supposed to purchase semiconductors, has no longer been able to do that. Tokyo Electron is still viewed as an outstanding company in Japan because its valuation is still strong, but it is still part of a declining domestic industry.

One option for Tokyo Electron was a joint development agreement with TSMC or Samsung. Tokyo Electron showed no interest in working with companies outside of Taiwan and Korea, such as Intel and GlobalFoundries. In fact, Tokyo Electron’s process engineers were shocked by an extremely-detailed explanation done by Intel about the process development during a previous collaboration in developing a new machine. When working together from the development stage, Intel seems to show their collaboration partner certain parts that may be beyond consideration. But Applied works with Intel and GlobalFoundries. Thus, Tokyo Electron may have shortlisted its choices for either joining forces with international semiconductor companies such as Intel, TSMC and GF, or joining forces with another machine maker such as Applied. Tokyo Electron decided on the later approach.

So why was Tokyo Electron said to be absorbed by Applied in the merger? This opinion might be based on the people involved in this merger. The executive chairman of the new merged company is Tetsuro Higashi, but the CEO is Gary Dickerson, who also is CEO at Applied. Although the executive chairman is the chairman of the Board of Directors, the doesn’t necessarily have direct touch with management of the company. In an international company, the boss after a CEO is not a COO (Chief Operating Officer), but a CFO (Chief Financial Officer). This CFO is not an accounting manager. The CEO and CFO always work as a pair and launch investments and acquisitions when needed. Therefore, the CFO is not only in charge of the funds on hand, he is also tied closely to the CEO, with a complete understanding of the overall financial condition of the company, including asset management. The main work area of COO includes operation and daily numbers managements. Launching an attack is completely under the power of CEO and CFO. These important positions are occupied by the Applied side.

Viewed from Tokyo Electron’s standpoint, the deal was signed while the company is still hot. The financial condition of Tokyo Electron is still okay. Hence, putting it up for sale will definitely invite and attract a big buyer. The company’s value is high. Unlike Panasonic, Sharp, and Renesas, which were bought at low prices because they waited until their valuations dropped, the thinking was that the Applied-Tokyo Electron deal had to happen now. The important thing in the Japanese business world is to be able to stay in business and at the same time to be able to protect the employees without cutting out any of them. It is not just about winning or losing.

Higashi is the only one left now in Tokyo Electron who can speak out about such outstanding management decisions. Therefore, it is not shocking at all that Higashi`s decision to make comeback as president and chairman last April was an effort to put this merger into reality.

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