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Could Teradyne be the next target in merger mania?

Robert Maire

Moderator
As we get ready for thanksgiving, we gave thought to possible next steps in the game of musical chairs and merger mania that is infecting the entire semiconductor industry.....

Will someone dare to step over that line in the sand between front and back end companies in the semi industry?


Going down the list
If we go down our list of public companies in the semiconductor equipment space and cross off KLAC (due to the Lam merger) and also cross off TEL (due to the failed AMAT merger), the next US company in terms of market cap size and revenue size is Teradyne, making it a suitable target in the ongoing game.

Is someone willing to cross an old line in the sand?
In the history of the semiconductor industry there has been a somewhat unwritten line in the sand defining the border between the back end and front end of the industry. With the back end typically looked at as being the poorer, ugly cousins of the snooty front end companies. Front end work of making wafers was done in shiny expensive clean rooms & fabs whereas assembly and test was usually done in an ugly nondescript factory in the poor end of town.

However, over time, that definition has changed as much of the assembly part of the back end of the semiconductor industry looks just like the front end or in fact is done in front end facilities. With stacking of die and interposers etc the line is blurred if not erased. Some companies such as Rudolph or Ultratech have had a foot in both segments of the industry for a while.

Is the taboo of intermarriage between front & back end semi companies over?
We would argue that as semi equipment growth prospects slow as evidenced by three straight years of flat capex (2014, 15 & 16) that companies will have to look outside their home turf for inorganic growth. This would imply that a merger between a large front end and a large back end company is now doable.

Teradyne Thanksgiving Turkey?
Teradyne looks like it has pretty good attributes as a target. Number one in its space. Good financial performance. Prospects for future growth within that space are not great as the market share split between Advantest and Teradyne appears stable and unlikely to change much so organic growth is limited. This is evidenced in the fact that Teradyne has bought companies outside its core semi space in a less than stellar attempt to get inorganic growth. There really aren't a lot of other semi test players that are "buyable".
Buying a robot company??? C'mon, really? Thats desperate....

Put it all together and Teradyne looks like a solid candidate to be bought by the right company....

Is AMAT that right company?
AMAT lost out on the long shot of trying to buy TEL and has just been shut out of KLAC and will now find itself in the uncomfortable and uncharacteristic place of a number two player unless it does something to prevent that. They could go after ASMI and beef up their ALD but ASMI is a tough and stubborn nut to crack even though AMAT had first right of refusal from an old law suit. Going after Hitachi could turn into another cross border, cross cultural problem and a repeat of the TEL spanking. FEI could be a bold, expensive step to shore up its process control side given the KLAC move to Lam. But a very simple and easily doable transaction would be to buy Teradyne.

Easy and painless and very, very doable....
Although Teradyne would not be nearly as big as doing TEL it would move AMAT's needle nicely and also add even more diversity to AMATs portfolio. This diversity of service and flat panel has helped offset some of the bumps in the industry and certainly helped in the just reported quarter. Teradyne is a US company with a similar culture, good financials and the deal would slide through the approval process with much greater ease than the current KLAC/Lam deal which will still makes customers uncomfortable. There is even less overlap between AMAT & TER as between KLAC & Lam.

AMAT could justify
We think it would be easy to justify given that AMAT already has tools that are in he back end. Perhaps the bigger justification would be to tie back end test to front end process control.

Wait and See
Though this combination is just our idle speculation it still makes a bit of sense, much as our proposed "KLAM" merger of KLAC and Lam made sense 8 months ago. We see no slowing of the merger frenzy and think that companies have to participate, aggressively or face the prospect of being the only person left standing without a dance partner and thus left behind......

Food for thought
We think that looking at the potential merger combinatorics in the semiconductor space is something to chew on as we have some spare time while enjoying our holiday meal. We will see if we can come up with some other bright ideas......

TEL's Terry Steps Down - The end of an era....
It is with some regret that we read the news release of "Terry" Higashi, the CEO of TEL stepping down out of that position. Terry has been a long term stalwart of the semi equipment industry and one of the few remaining founding fathers of the industry with great respect from all sides both customers and competitors. However, his departure was inevitable but the proposed AMAT/TEL merger that failed would have given Terry a more momentus exit. Terry ranks up there with Jim Morgan and Ken Levy and others who have built the industry from nothing.....

Happy Thanksgiving!!!!
 
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