Lam Research to Buy Novellus for $3.3 Billion
By Mark LaPedus, SemiMD senior editor
Moving to compete against Applied Materials Inc. and Tokyo Electron Ltd. (TEL) in the broad line fab tool sector, Lam Research Corp. has entered into a definitive agreement to acquire Novellus Systems Inc. in an all-stock transaction valued at approximately $3.3 billion.
The combined enterprise will retain the name of Lam Research Corp. The two companies possess complementary product capabilities, with Lam in etch and single-wafer clean equipment aligning with Novellus in thin-film deposition and surface preparation technologies. The combined company will accelerate their efforts in the 3D and 450mm equipment sectors.
The new and combined Lam will compete in the broad line fab tool market against Applied and TEL. But the blockbuster deal also comes amid a major downturn in the industry. Worldwide semiconductor capital equipment spending is expected to total $51.7 billion in 2012, a 19.5 percent decline from 2011, according to Gartner Inc.
“This strategic combination positions Lam Research to lead the development of next-generation semiconductor manufacturing technology and productivity solutions at a time when growing semiconductor demand and increased device complexity are creating significant business opportunities,” said Steve Newberry, vice chairman and chief executive of Lam Research.
Martin Anstice — who, as previously announced, will assume the position of CEO of Lam Research from Newberry effective Jan. 1, 2012 — will continue as CEO following the close of the transaction. He is currently Lam’s president and chief operating officer.
Timothy Archer, chief operating officer of Novellus, will become chief operating officer of the combined company; and Ernest Maddock, chief financial officer of Lam, will remain chief financial officer. The board of directors of Lam will add four new directors jointly nominated by Lam and Novellus.
Richard Hill, chairman and chief executive of Novellus, does not appear to be part of the equation. He will serve as an adviser for the combined entity. “I will be stepping aside,” he said during a conference call.
The new and combined Lam have “complementary products and technologies,” Anstice said during the call. The deal ”strengthens our position within the industry.”
Founded in 1980, Lam has about 3,750 employees. It had annual revenue of about $3.1 billion. Founded in 1984, Novellus has about 2,700 employees. It had annual revenue of about $1.5 billion.
Lam is the world’s largest plasma etch vendor. In 2007, Lam acquired the SEZ Group, a leading supplier of single wafer clean technology. Meanwhile, Novellus is a supplier of tools in chemical vapor deposition (CVD), physical vapor deposition (PVD), electrochemical deposition (ECD), and dry strip.
Lam has been quietly developing 450mm gear. Novellus has developed alliances in the 3D TSV equipment sector. Both companies have tried but failed in CMP. The combined entity does not have a presence in ion implantation, and, to a large degree, in wafer inspection.
Analysts said the deal makes sense. “While Lam’s shares may come under pressure near-term given the all-stock bid, we like this transaction as we believe it sets the path for meaningful share gains as increasingly more complex semiconductor manufacturing benefits from the combination of the best of breed tools from Lam/Novellus,” said C.J. Muse, an analyst with Barclays Capital.
The deal is “highly complimentary from a customer perspective — Lam is strong at foundry/memory, while Novellus is strong at Intel,” Muse added.
Dean Freeman, semiconductor manufacturing analyst at Gartner Inc., said the deal helps give customers “an alternative to Applied’s TSV process.” Lam can provide the silicon etch and cleaning processes, while Novellus has the ability to provide the CVD and metallization layers. Customers can turn to Ebara or Applied Materials for the CMP steps in a TSV flow.
Freeman noted that Lam has strengths in customer service and product development, which may help Novellus gain market share in the memory space and with customers Novellus “has shunned in the past.”
On the flip side, Novellus brings its strong presence at Intel to the merger, and opens doors for the expanded Lam Research at Intel in etch and clean. “It is possible that this will now give Lam a better audience at Intel for the etch product. Lam’s silicon product is superior to both Hitachi and TEL. The dielectric product is on the same level as TEL’s so there is the potential for penetration,” Freeman said.
Also, Lam gains better access to developing etch and deposition processes, creating unit processes, especially for the double and triple patterning that is becoming increasingly common. Potential synergies exist in the etch/strip/clean space as well.
“Novellus is known as the low-cost leader in process efficiency and manufacturing. The merged company can leverage this benefit and create better margins,” he said. However, there are always challenges when different corporate cultures are combined.
The merger could prompt ASM International and Tokyo Electron to step up their own partner searches, perhaps prompting an ASMI/TEL merger, he said. Hitachi HiTech also will need to bolster its silicon position at Intel and other key customers as they are now making equipment decisions at 14nm, Freeman said.
Under the terms of the agreement, Novellus stockholders will receive 1.125 shares of Lam Research common stock for each share of Novellus that they own, in a tax-free exchange. Based on the closing price of Lam’s stock on December 14, 2011, the transaction values Novellus at a price of $44.42 per common share. Upon closing, Lam and Novellus stockholders will own approximately 59 percent and 41 percent, respectively, of the combined company.
Total cost synergies are expected to be approximately $100 million on an annualized basis by the fourth quarter of 2013. In addition, Lam announced a $1.6 billion common stock repurchase program. This new program, which replaces Lam’s existing share repurchase program, is targeted to be executed over the 12 months following the close of the transaction. Lam expects the transaction to be accretive to its non-GAAP earnings within one year after transaction close.
The closing of the transaction is subject to customary conditions, including approval by Lam’s and Novellus’s stockholders and review by U.S. and international regulators. The companies expect the transaction, which has been unanimously approved by both Lam’s and Novellus’s boards of directors, to close in the second calendar quarter of 2012.
