A Deeper Look at the Applied Materials-Tokyo Electron Merger
The combination makes plenty of sense and should better position the firm for the future.
Applied Materials (AMAT) and major Japanese chip equipment maker Tokyo Electron are planning to merge in an all-stock deal that is expected to close in the middle or second half of 2014 and will create a combined company valued at roughly $29 billion. We view the deal favorably, as it should affirm Applied's position as a wide-moat firm in chip equipment. Although the transaction will involve two of the three largest firms in the semiconductor equipment industry, both of which compete with each other in some segments, we view the deal as complementary, given that Applied's strengths tend to be TEL's weaknesses and vice versa. After the merger, Applied-TEL will have a significant presence across many key market segments, which we believe should bolster the combined company's competitive position. In addition, the merger will better position Applied-TEL from a technological standpoint, as the two firms can pool their technical expertise across various process steps involved in chip fabrication, thereby allowing the combined company to better develop next-generation manufacturing tools to help chipmakers scale down Moore's law.
A Merger of Two Majors
Applied Materials and TEL are two of the three largest chip equipment firms in the world. (ASM Lithography (ASML) is the other.) Both firms have broad product portfolios that span a number of key segments in the front-end wafer fab equipment portion of the chip equipment market. Front-end equipment is used to fabricate the circuitries on semiconductor wafers, while back-end tools are used in testing and separating the wafer into individual dies, which are then assembled and packaged into final chips. The front-end wafer fab equipment portion is vastly larger than the back end, with total revenue in 2012 of $32 billion versus $6 billion, according to technology research firm Gartner. Applied and TEL have no presence in the back end.
Andy Ng does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.