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Technology Stocks : Veeco Instruments-Who? -- Ignore unavailable to you. Want to Upgrade?

To: semi_infinite who wrote (2962)	7/15/2002 9:41:20 AM
From: Robert Douglas	Read Replies (1) \| Respond to of 3069

Bear Stearns doesn't like value of merger and lowers rating. Key Points * We are reducing our rating of Veeco from a Buy to an Attractive rating based on the merger announced Friday July 12th. We are also cutting our price target in half from $60 to a more realistic $30 per share. Though in the long run the merger makes sense, we feel in the short run there could be considerable uncertainty. * We are somewhat surprised by the terms of the transaction. Prior to the transaction, Veeco and FEI were relatively similar companies with similar market caps, but the merger gives FEI a 50% valuation premium over Veeco. FEI shareholders wind up with 60% of the merged company though six board seats to Veeco’s seven in the merged company’s 13 (it is somewhat unclear who is buying whom even though Veeco is the surviving entity on paper). This valuation premium of FEI over Veeco rather than a merger of equals calls into question the future value of some parts of Veeco such as process equipment and data storage. * The most similar transaction in Veeco’s history was the acquisition of CVC, a public company a bit smaller than Veeco at the time, but for which a substantial premium was paid in what turned out to be poor acquisition. The Veeco-FEI merger may also include differing management styles as did the CVC merger. * Given the recent sale of IBM’s disk drive unit to the Japanese (which has been a good customer of Veeco’s) and the weakened outlook for process equipment such as CVC and Ion Tech, the merged entity will likely focus most of its efforts on the metrology side which seems to have a brighter outlook and may account for the valuation disparity between FEI (which is all metrology) and Veeco which is metrology and (potentially lower valued) process equipment. *** In the longer timeframe we feel the merger is a great strategic fit. FEI and Veeco have very complementary technologies and customer bases. The combination brings both companies way up the ladder in the metrology business to the number 3 position. However in the short term the merger valuations call into question the valuation of Veeco. We feel the market reacted in the most efficient way on Friday and appropriately valued Veeco at $18, which if you do the math is the correct valuation given FEI’s trading price. This would imply that FEI was most appropriately valued. In the near term we would prefer to sit on the sidelines and wait for the dust to settle on the merger, the quarter, the valuations and the sector before buying more shares (we would get more interested if the shares fell below $15).