A Melancholy Farewell To FSI International

By Stephen D. Simpson, CFA | August 13, 2012 AAA

There are two kinds of investors - those who've watched a great idea slip away and liars. In other words, it's just part of the nature of investing that eventually you're going to identify a great stock and somehow, for some reason, not buy it before its big move. With today's news that Tokyo Electron is buying up-and-coming semiconductor equipment company FSI International (Nasdaq:FSII), I add another stock to that not-so-illustrious list.

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The Deal
The companies announced that Tokyo Electron, a huge Japanese manufacturer of semiconductor equipment and prime rival of Applied Materials (Nasdaq:AMAT), will acquire FSI International in a $253 million cash tender that values FSI International at $6.20 per share.

At that price, FSII shareholders are reaping a 54% premium to August 10th's close and the highest price that the stock has seen in six years. All of that said, it's not exactly an expensive deal for Tokyo Electron. With estimated revenue of $145 million for fiscal 2012, Tokyo Electron is paying about 1.7 times sales - not an especially high price by the standards of the industry.

SEE: A Primer On Investing In The Tech Industry

Why Is Tokyo Electron Doing This Deal?
FSI International specializes in surface conditioning equipment for chip makers - equipment that cleans wafers before the other steps of the chip-making process begin. Most investors probably know that the semiconductor manufacturing is extremely precise and sensitive; contaminants simply cannot be tolerated. Consequently, surface conditioning equipment is mission-critical.

FSI International is a small company, but its Orion system (first released in 2010) represents a meaningful step forward. Unfortunately, the company has proven too small to really translate that engineering edge into meaningful market share. With this type of equipment being a classic case of "failure is not an option," customers like Intel (Nasdaq:INTC) and Taiwan Semiconductor (NYSE:TSM) have been hesitant to move away from market-leading Dainippon Screen and give the scrappy newcomer a chance.

This is where the deal can really become a winner for Tokyo Electron. Tokyo Electron is the #2 player in batch process and #3 in single wafer (Dainippon has more than 50% share in each market category), can now leverage FSI's better mousetrap through a large and established sales channel. What's more, customers know that Tokyo Electron is going to be around next year, in five years and in 10 years - a potentially significant competitive differentiating factor.

For investors curious about the space in general, this deal is unlikely to shake up Lam Research's (Nasdaq:LRCX) positioning in single wafer processing. Likewise, it's not really a major development for Applied Materials - while I had thought AMAT might be interested in buying FSII as well, surface conditioning is a small business for AMAT (it has less than 5% share) and it is unlikely that Applied Materials could have quickly leveraged this deal.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
I won't pretend that I'm not gutted to see this deal announced on Aug. 13, 2012 , particularly as I was literally intending to buy the stock this week. I suppose that's proof positive that you can easily wait yourself out of good ideas just as easily as buying in too soon. In any case, it does prove that legitimately good technology seldom stays unappreciated in the market indefinitely.

This is a reasonable deal for FSI International shareholders. I thought the stock was worth north of $8, but there was quite a bit of risk and uncertainty as to the timing and trajectory of the company's growth. When weighing the challenges of taking on Dainippon and Tokyo Electron and the certainty of over $6 per share in cash on the barrel, it seems like a win-win deal for both FSI International and Tokyo Electron.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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