The more I look into it, the more I love this deal with IPEC. The reasons follow:
1) Tremendous synergies
Most people dont realize it, but these companies are only about 10 miles apart. That greatly reduces the risk and the cost of the merger. They will have lower costs due to a smaller number of field service offices, lower sales expenses, lower administration expenses, and dramatically lower R&D expenses. Based on my back-of-the-envelope estimates, it looks to me like the deal is slightly dilutive to earnings if no cost savings are assumed, but it will definitely be accretive within a few quarters based on the synergies.
2) Improvement in R&D quality
Putting together the best of the engineers from both companies is almost certain to improve the effectiveness of the R&D dollar. I don't see any significant synergies between the product lines of the two companies for the existing generations, but the next-generation product of the combined company should be superior to what either could have offered independently.
3) Elimination of a competitor
From either companies' point of view, a competitor has been eliminated. They can now compete with AMAT and the other smaller competitors from a position of much greater critical mass. This will be very important during the impending upturn.
4) Improvement in financials
IPEC greatly improved its balance sheet. The bankruptcy risk premium should come out of that stock, increasing its market value. For SFAM, the balance sheet is weakened, but they have now diversified their installed base of customers and reduced their break-even point (due to cost savings).
5) No price premium paid
IPEC was not in a very good negotiating position, and SFAM made the most of it. It's amazing to get a merger like this with substantial loss of control by IPEC without any price premium.
To me, SFAM has made appropriate use of its cash during the downturn and has shown quality leadership by Faubert and the SFAM Board. Roger Marach is also looking quite smart for floating the most recent secondary offering when the stock was at much higher prices to generate the money that made this merger attractive to IPEC.
Profitable investing,
Mr. Sam |
