With Wednesday's announcement of its deal for Varian Semiconductor (Nasdaq:VSEA), Applied Materials (Nasdaq:AMAT) has to get full marks for a shrewd move and a surplus of chutzpah. It was just the other day when a major analyst downgraded Applied Materials on the basis of questions about the semiconductor equipment cycle. Clearly AMAT is playing with a longer-term horizon.

Tutorial: Mergers And Acquisitions 101

The Deal
Applied Materials has reached a deal with Varian to acquire the company for $63 per share in cash. That is a total price of $4.9 billion or about $4.6 billion after netting out Varian's cash. At this price, Applied Materials is paying a 55% premium for Varian shares, and giving investors the best price these shares have ever seen (and a 29% premium to the consensus analyst target price, for the very little that is worth). (For more, see Mergers And Acquisitions: Understanding Takeovers.)

What Applied Materials is Getting
In many respects Applied Materials is getting two really interesting businesses in one deal. Varian is a leader in ion implantation systems, tools that basically build transistors on chips through doping. Varian has really benefited from an industry switch towards single-wafer processing and has built a roughly 75% market share in this business. In fact, Varian is well ahead of rivals like Axcelis (Nasdaq:ACLS) and Applied Materials quit this business years ago after finding it too difficult to get competitive traction.

In some respects, the acquisition of Varian's ion implantation business is really just "more and better" to what Applied Materials already does. Varian counts major chip companies like Intel (Nasdaq:INTC) and major fabs like Taiwan Semiconductor (NYSE:TSM) as prime customers, so it won't do much of anything to lessen AMAT's reliance there.

There is another important side to Varian, though, and that is its offerings for the solar market. Varian has the Solion system, a tool that offers higher efficiency (more energy produced) and lower costs to solar manufacturers. While it is still early, it stands to reason that companies like Suntech (NYSE:STP) and Yingli (NYSE:YGE) would be interested parties, and Varian has been pursuing partnerships with several Chinese solar firms. As with the ion implantation business, Varian's Solion will have competition (Amtech (Nasdaq:ASYS) and Intevac (Nasdaq:IVAC) come to mind), but Solion seems to be the better mousetrap so far.

More Deals on the Way?
Any time a major player like AMAT makes a move, there is a rush to figure out whether or not another wave of deals is imminent and who might get involved. This deal, though, seems very highly focused - Applied Materials is getting back into a business it lacks and is getting a valuable solar equipment kicker as well. That might argue against any widespread moves, then, as this could be a pretty unusual setup of needs being met through a deal.

Still, in the interests of playing along, companies like MKS Instruments (Nasdaq:MKSI), Cymer (Nasdaq:CYMI) and Brooks Automation (Nasdaq:BRKS) are all pretty focused niche equipment companies with business lines that could appeal to some of the larger equipment players. Likewise, a company like Axcelis or Amtech could appeal to an AMAT rival that wants to try to match this move.

The Bottom Line
Applied Materials is not getting a lot of love right now and the signs of a slowdown in the chip sector (and the chip equipment sector) could make this a more difficult hold. Still, it looks like there is a lot of value here. All in all, it makes more sense to buy a quality name like AMAT before everybody else wants to own it than to buy in the middle of some sector-wide melt-up. (For more, see 5 Hot Semiconductor Stocks.)

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Tickers in this Article: AMAT, VSEA, MKSI, BRKS, CYMI, ASYS, ACLS

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