Applied & Tokyo Electorn Give A New Name & Logo To Their Merged Entity

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AMAT: Applied Materials logo
AMAT
Applied Materials

Applied Materials (NASDAQ:AMAT) announced its merger with Tokyo Electron in an all-stock deal valued at more than $7 billion in September last year. Earlier this week, the two companies unveiled the new name and logo of the combined entity which will be used once the merger closes in the second half of the year (expected time). Built on the strong legacies of Applied and Tokyo Electron, the name of the merged company — Eteris — is derived from the concept of eternal innovation for society. The logo symbolizes the expanding future opportunities driving a new era of innovation and growth. With a new name, mission and vision, Applied and Tokyo Electron intend to move quickly and begin to create value as soon as the merger closes.

Both Applied and Tokyo Electron supply equipment used to manufacture semiconductors, flat-panel displays and solar photovoltaic products. U.S. based Applied Materials is the world’s largest maker of semiconductor equipment by sales, followed by ASML Holding NV and Tokyo Electron. [1] With an estimated value of $29 billion, the combined entity aims to become a global innovator in semiconductor and display manufacturing technology. After the close, Applied Materials and Tokyo Electron shareholders will own approximately 68% and 32% of the new company, respectively.

Last month, 99% of Applied’s shareholders voted in favor of adopting the company’s business agreement with Tokyo Electron.

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Weak Demand From Chipmakers Has Lowered Profits For Equipment Manufacturers

On account of lower capital spending by its customers in this cyclical industry, Applied’s net income has fallen steadily in the last two years. Tokyo Electron has also seen its profits stagnate in the past few years, primarily due to lower demand for tools. Given that capital intensity of the industry increases as the technology advances, manufacturers worldwide have increasingly outsourced semiconductor manufacturing to foundries such as Taiwan Semiconductor Manufacturing Co Ltd (the so-called “fab-lite” model), even as new entrants with advanced products adopted the so-called “fabless” model.  Accordingly, the level of demand for semiconductor equipment is increasingly dependent of the specific technology adoption cycles of these few remaining players.

The semiconductor industry’s capacity addition growth rate increased from 6% in 2003 to 20% in 2007, driven primarily by DRAM and NAND companies in Korea, Taiwan and China. New capacity addition declined from 7% in 2010 to 4% in 2014. The industry association SEMI expects worldwide semiconductor capacity to increase by 4% in 2014 and 6% in 2015, with foundries and NAND Flash manufacturers driving growth. [2]

Gartner estimates capital equipment spending in the semiconductor industry to increase by 12.2% and 12.8% in 2014 and 2015, respectively. [3] Rising mobile shipments, growing NAND demand, the pending technology transitions (22nm and 16 nm, FinFET, and 3D NAND) and a recovering DRAM market are key factors driving demand for semiconductor equipment.

By pooling in their expertise, both Applied and Tokyo Electron will be in a stronger position to benefit from the above trend.

How Applied Can Benefit From The Merger

Higher wafer fab equipment (WFE) share: The combined WFE share of Applied and Toyko Electron is estimated at 34%. [4] Though the WFE market declined by 8% in 2013, research firm Gartner believes the market will grow 13% and 11% in 2014 and 2015, respectively. [5] In calendar year 2013, Applied gained 1.4 points of wafer fab equipment market share, ending the year at its highest level since 2006. [6]

Shared R&D Costs: The ongoing mobility trend is driving fundamental technology changes in the industry, which have become more difficult and complex over time. Merging its R&D capabilities with Tokyo Electron and bringing together complementary technologies will enable Applied to create an expanded set of capabilities and increase its opportunity to enable major future technology inflections and advance customers’ roadmaps in both semiconductor and display markets.

Broader Product Portfolio: Featuring among the three largest chip equipment firms, Applied and Tokyo Electron have fairly broad product portfolios. Although they have some overlapping products, their businesses target different sub-segments of the industry.  The two companies believe they will gain by leveraging each others’ expertise and technological prowess. By pooling knowledge and expertise, both companies stand to improve their technological advantage.

Lower cost of developing chips: The semiconductor industry is consolidating due to rising costs of developing cutting-edge chips. This had led to fewer manufacturers buying capital equipment sold by Applied Materials and its competitors. ASML Holding NV acquired U.S.-based Cymer last year for about $2.5 billion, while Lam Research Corp bought smaller rival Novellus Systems Inc for $3.3 billion. [7] The combined expertise of Applied Materials and Tokyo Electron will help the new company tackle rising costs of developing cutting-edge chips and slowing semiconductor demand.

Our price estimate of $19 for Applied Materials is at an approximate 15% discount to the current market price.

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Notes:
  1. RPT-UPDATE 2- Applied Materials to buy Tokyo Electron, create $29 bln company, Reuters, September 24, 2013 []
  2. Semiconductor Capacity Growth Rate Slows, Electronics360, January 16, 2014 []
  3. Gartner Says Worldwide Semiconductor Capital Equipment Spending to Increase 12.2 Percent in 2014, Gartner Newsroom, April 24, 2014 []
  4. Why the merger of two major chip equipment giants may not spur antitrust concerns, Venture Beat, September 24, 2013 []
  5. Gartner Says Worldwide Semiconductor Capital Equipment Spending to Increase 12.2 Percent in 2014, Gartner Newsroom, April 24, 2014 []
  6. Applied Materials’ (AMAT) CEO Gary Dickerson on F2Q 2014 Results – Earnings Call Transcript, Seeking Alpha, May 16, 2014 []
  7. Applied Materials to buy Tokyo Electron for $9 billion, Yahoo News, September 24, 2013 []