Lam, Novellus Deal Boosts Semiconductor Capital Equipment Stocks

Date : 12/15/2011 @ 1:01PM
Source : Dow Jones News
Stock : Kla-Tencor Corp. (MM) (KLAC)
Quote : 100.59  1.07 (1.08%) @ 8:00PM

Lam, Novellus Deal Boosts Semiconductor Capital Equipment Stocks

Lam Research Corp. (MM) (NASDAQ:LRCX)
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-- Lam, Novellus deal proposal boosts trading in semiconductor capital equipment stocks

-- Follows similar move in May by Applied Materials deal with Varian Semiconductor

-- News boosts Philadelphia Semiconductor Index

   By Dan Gallagher 

The proposed $3.3 billion combination of Lam Research Corp. (LRCX) and Novellus Systems Inc. (NVLS) boosted trading on other stocks in the semiconductor capital equipment arena Thursday, as some analysts speculated of further deals in the segment.

Late Wednesday, Lam Research (LRCX) announced plans to acquire Novellus Systems (NVLS) in an all-stock transaction worth about $3.3 billion.

The deal follows a similar move in May by sector leader Applied Materials Inc. (AMAT), which signed a deal to buy Varian Semiconductor for $4.9 billion in cash.

The Lam-Novellus deal represented a 28% premium for Novellus over its most-recent closing price, for a stock that had already run up more than 30% in the last few months. Other stocks in the semicap space got a boost on Thursday from the news, helping the Philadelphia Semiconductor Index to rise as much as 2% in early trades.

"In terms of implications, we believe that this deal could spark another wave of deal-making for the space," wrote Patrick Ho of Stifel Nicolaus.

The deal leaves KLA-Tencor Corp. (KLAC) as one of the few large-cap names in the space that has not undertaken a major deal. The stock was last trading up 1% at $46.70, and is up about 17% since early October.

Ho named other, smaller firms as potential deal targets, including Nanometrics Inc. (NANO) , Rudolph Technologies Inc. (RTEC) and Nova Measuring Instruments Ltd. (NVMI, NVMI.TV). Nanometrics and Nova shares were up last 4% and 3%, respectively, while Rudolph maintained fractional gains.

"We believe that many of these companies serve niches that can be integrated easily within a larger entity [or combined with one of similar size]," Ho wrote. "Additionally, there are many more private companies in the process control space with unique and different technologies that could be better leveraged as part of a larger company."

James Covello of Goldman Sachs wrote in a note that he believes "the consolidation in [the semicap space] will help the industry to deal with an increasingly concentrated customer base and growing R&D requirements." Those costs for research and development are rising "as equipment companies need to support a variety of 3D chip initiatives and also invest for the 450mm wafer transition," he noted.

But, Covello added that he believes "additional large-scale M&A" in the segment is unlikely.

"A deal for Novellus had been debated for several years in the industry and was a possibility we discussed this year," he wrote. "Between this deal and other acquisitions over the last five years, there are now just two main tool providers for most products."

Weston Twigg of Pacific Crest said the Lam-Novellus deal "should increase investor interest in the group as a whole," given growing demand for electronics products, especially ones that use NAND flash memory such as smartphones and tablets.

"With Applied Materials' recent acquisition of Varian and now Lam's acquisition of Novellus, we are in a period of consolidation," Twigg wrote. "Most semiconductor equipment companies now have very profitable models with high cash generation; share buybacks and dividends are increasing, and additional consolidation is a likely outcome."

However, Twigg shied away from naming potential buyout targets, recommending that investors "focus simply on companies with strong product cycles and good execution, such as ASML [Holding NV (ASML, ASML.AE)] and KLA-Tencor."

-By Dan Gallagher; 415-439-6400;

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