Acquisitions Key for Applied Materials
Sunday August 24, 9:19 am ET
By Daniel Sorid
biz.yahoo.com
SAN FRANCISCO (Reuters) - Sales of microchip-making equipment are in the doldrums, but the industry's leader may have an ace in the hole: a massive stockpile of cash that is getting bigger by the quarter.
With more than $5 billion in cash and short-term investments, and a stock price that has nearly doubled from last year's lows, Applied Materials Inc. (NasdaqNM:AMAT - News) could potentially reshape the company and the industry with a major acquisition, analysts and investment bankers said.
"It's an industry that should consolidate, because there are advantages to scale," said Byron Walker, chip equipment analyst for UBS. "What does Applied have? A huge distribution system and lots of cash. So what's it cost them to put one new product through their distribution system? Not a lot."
Growth has recently eluded Applied. Revenue at the Santa Clara, California, company is less than half of 2000's record $9.6 billion, and the company has had nothing but losses since the start of its fiscal year in October.
In a recent interview with Reuters, Applied Materials Chief Executive Michael Splinter said: "We have to think about potential acquisitions," as a way to supplement growth.
Still, he said he intended for Applied to grow primarily on its own. Applied introduced eight products at an industry conference in July, each a threat to rivals such as Novellus Systems Inc. (NasdaqNM:NVLS - News). and Lam Research Corp. (NasdaqNM:LRCX - News)
GOING DUTCH
One area untouched by Applied Materials is lithography, the photographic process that prints circuit patterns on silicon wafers. Its lack of presence in that area has led to speculation about a mega-merger with Dutch company ASML (Amsterdam:ASML.AS - News), the leading lithography equipment supplier.
"I think ASML is proceeding down the avenue of being a pretty dominant player in their lithography business and they continue to gain share," said Mike Kelly, vice chairman of technology investment bank Broadview International. "That would be definitely something the size that Applied seems to feel comfortable with.
European semiconductor analysts asserted that ASML is strongly averse to a takeover, and could throw up enough roadblocks to disrupt a bid from Applied Materials. Moreover, no company has ever succeeded in building both lithography tools and the equipment that performs the primarily chemical-based operations that actually build microchips.
Nevertheless, Applied Materials has made overtures to ASML in the past about a takeover, said Mark FitzGerald, the chip equipment analyst for Banc of America Securities (News - Websites).
"Lithography is the last big segment they don't participate in," FitzGerald said. "It would make sense for them to buy growth, and at some point do an acquisition that could really change the composition of the company."
Alternatively, Applied Materials could partner with one of two other lithography companies: Japan's Canon Inc. (Tokyo:7751.T - News) and Nikon Corp. (Tokyo:7731.T - News) An acquisition of one of the Japanese companies is practically impossible, analysts said, because of the complex structure of many large Japanese firms.
"Applied is fairly big in everything outside of lithography, so if they want to grow they have to crack lithography," said Ulrich Pelzer, a London-based semiconductor analyst for Lehman Bros. "But in order to crack lithography, you have to go to the Japanese, and there you have a huge cultural barrier, or you have to go to ASML."
Applied Materials spokesman David Miller declined to comment on any acquisition strategy. ASML spokeswoman Elizabeth Kitchener also declined to comment.
TAKING ON KLA-TENCOR
Another hole in Applied Materials' product line is in silicon wafer inspection and measurement equipment, an area dominated by KLA-Tencor Corp. (NasdaqNM:KLAC - News; The 1997 merger of KLA Instruments and Tencor Instruments is seen as one of the few successful major deals in the semiconductor arena.)
The challenge for Applied Materials is finding a target of appropriate size to build up its business. Smaller companies such as Rudolph Technologies Inc. (NasdaqNM:RTEC - News) and Nanometrics Inc. (NasdaqNM:NANO - News) could boost Applied's offerings in the space, but beyond KLA-Tencor there are not many targets of such scale.
KLA itself could pose a threat, should it make use of its $1.5 billion in cash and short-term investments to buy one of Applied's rivals, FitzGerald said. KLA-Tencor said its CFO was out of the country and could not immediately comment.
In 1997, Applied Materials paid $285 million cash for two Israeli companies, Opal Inc. and Orbot Instruments Ltd. The acquisitions succeeded in laying the groundwork for a measurement and inspection business, but the area remains a small, if fast-growing, part of Applied's total business, FitzGerald said.
Perhaps the biggest barrier to a major acquisition is psychological. The company's last big purchase, the 2000 acquisition of Etec Systems for around $1.5 billion, has performed poorly, analysts say, and is now being restructured.
While the barriers are high, Applied Materials has hinted it would be willing to make use of its $5 billion hoard. In July, Chief Financial Officer Joseph Bronson, waving off a question about whether the company would use its cash to issue a dividend, suggested other uses.
The cash, he said, "gives us an opportunity to do something big if we need to, if we want to." |
