Robert Maire
Moderator
We think that while KLAC is great for Lam and a great fit much like Lam/ Novellus before it, could others need/want it more?
Nobody wants to be left standing alone at the high school dance and KLAC could be anyone's partner
KLAC and Lam have been dating and flirting for a while....
Its clear that much like the eventual Lam/Novellus merger a few years ago that Lam and KLA have been on more than a few dates. KLA buying Lam, a merger of equals then finally Lam buying KLA. Its a combination that makes sense to both sides and just needs the right circumstances to come to fruition.
The right circumstances presented themselves when the market caps of both companies crossed along with KLAC doing a gift giving recap and Lam amassing cash. The timing is also right as Lam had pretty much finished absorbing Novellus and KLAC could find nothing of interest to buy. So both sides didn't have a lot to do that would make sense and move the needle.
Martin Anstice is clearly on a mission while KLA is a conservative ATM. With KLA's stock swooning in the 50's due to a long weak period while Lam had shot up to $85 on a roll, the deal obviously made even more sense. We can only imagine that in the few weeks before the deal was announced there were likely some nervous conversations and perspiration as Lam's stock price fell off a cliff and looked like a straight shot to $60 on its way to joining KLA in the 50's. But a deal was crafted and agreed and announced and the stock bounced back half way and stopped at $75 where it is now.
Not a slam dunk despite zero overlap
The PR spin on the approval of the deal is essentially identical to what we heard on the AMAT/TEL. The company saying zero overlap means slam dunk, while in AMAT's case they said minimal overlap and slam dunk. While overlap may be the primary test in the US, the rest of the world has its own rulebook or lack of rulebook. We can be relatively assured that China with its $100B aspirations in the semiconductor industry are going to look at this deal as a slightly less obnoxious version of the AMAT/TEL deal furthering the US's dominance and virtual monopoly on chip manufacturing equipment. While Samsung and Intel may not be up in arms as they were with the AMAT deal, they will likely have their hand out for some concession to let the deal move ahead. Though in the end we think the deal gets done we think mid 2016 is overly optimistic and end of 2016 is more like it.
Plenty of time for someone else to step in or circumstances to change
What about AMAT?
We have to admit that our first reaction to the announcement of the AMAT/TEL deal was shock that AMAT didn't make a play for KLAC first. After all Gary Dickerson had been raised at KLA and buying the company would be poetic justice for many different reasons.
The obvious question that everyone will raise is what about AMAT's process control business. I would argue that if given the choice I would easily divest the Israeli , process control operations of AMAT to get my hands on KLAC if I were AMAT management. KLAC is far more dominant and makes much more sense. Its more synergistic and perhaps more importantly blocks Lam or ASML from getting their hands on this crown jewel in the industry. Bottom line, KLAC is worth jumping through hoops for.
A far off pirate operation?
AMAT's process control in Israel has been little more that a loose affiliate since its days as Opal and Orbot and with the departure of Dan Maydan and Sass Somekh perhaps not as close to the mother ship in the valley as one would hope to get maximum synergy (much like the skull and cross bones flag flown by the Mac group across the street from Apple headquarters).
KLAC is a quick drive across silicon valley from AMAT (roughly as far away as Lam is), speaks english, with similar culture, and we are sure Gary still knows the company quite well and could navigate his way around KLA blindfolded. Clearly a thousand times better than flying halfway around the world to either Japan or Israel to speak a different language with a different culture and try to get synergies and integrate the operations.....Sounds like a "no-brainer..."
The hair of the dog that bit you.....
If we are in AMAT's shoes we can take our defeat on the TEL acquisition and go off into a corner and reorganize our operations or double down and come out on the offensive, swinging. Buy something, buy anything as chip equipment properties that matter are getting fewer and further between. Stop Lam from buying KLAC.
One could argue that Lam buying KLAC is the most serious threat to AMAT in its history. Lam already dominates in etch, does well in dep and adding KLAC would have it dominate in process control as well, all of which would look better than AMATs current business configuration. If AMAT managed to get KLAC and divest its Israel operations, Lam would still be way behind and would have a hard time catching up as the rest of the available companies would not get Lam to parity let alone ahead.
Expensive but maybe worth it...
Obviously all this would not be either cheap or easy, but all good things come with a price and while TEL was comparatively cheap, it was cheap for a reason. Divesting current process control would be expensive but the resulting combination would be great. Divesting would allow AMAT to make the same "zero overlap" statement. Maybe doing a deal with KLAC would be worth all the remedies that everybody wanted on the TEL deal because the end result would have more value with less issues than the TEL deal.
Maybe at the very least it would cause Lam to pay more even if unsuccessful, and that in itself would be a success, which is better than watching it happen and doing nothing....
ASML has even more reason to buy KLAC than either Lam or AMAT???
Even more logical than the Cymer acquisition.....
ASML had correctly and successfully made the argument to the industry and regulators that it needed to buy Cymer to integrate and accelerate the efforts of developing an EUV light source that has proven to be extremely difficult even with the combined resources. This is despite the obvious conflicts with both Nikon and Canon. Had Cymer remained on its own we probably wouldn't even be at the 80 watts where we are today we would have been light years behind (pun intended...).
I can make the same and perhaps even better argument for ASML to buy KLAC...
Right now, KLAC has made it quite clear that the odds of it developing a critical EUV reticle inspection system are slim to zero. At a minimum it would take a $500M check that no one seems to want to pony up. Even that may not be enough...
What reticle inspection tool????
Once Lam gets KLAC the odds of an EUV reticle inspection tool happening become a negative number....essentially "fuhgeddaboudit...", even for all the money in the Netherlands. Why? Its simple....Lam has had huge benefit from the delay of EUV and has sold a lot of extra dep and etch tools for the multi patterning party that has gone on without EUV. Lam would be out of its mind to do anything to help or accelerate EUV.
Half baked alternatives....
While there are alternatives to EUV reticle inspection , such as the pellicle "pop top" or wafer inspection after print they fall well short of optimal, high volume production ready, solutions not very conducive to convincing chip companies to adopt EUV.
In short, ASML could get the key, enabling reticle inspection, by buying KLA and making it the priority it should be as it is almost as critical as the source technology it bought Cymer to get.
KLAC may fit ASML better than Lam...
Financially similar models....
One could also argue that KLAC is a better fit for ASML. They both are highly dominant in their respective markets, the number one by a wide margin. They both sport high margins as compared to the rest of the industry due to this positioning and mint money.
A great technology combination too..
In our view litho tends to drive the train of Moore's Law progress (perhaps with recent exceptions..) and process control/measurement is a close second in value to the industry. Putting together the litho with process control, would combine the two highest value processes especially given KLA's reticle inspection systems which are crucial to litho. A more synergistic, value added combination as compared to dep and etch.
Less regulatory conflicts???
ASML and regulators could easily argue that having KLAC as part of Lam could bias and conflict with chip makers ability to use other dep and etch providers such as AMAT, ASMI, TEL and Hitachi etc; as Lam dep and etch would have an unfair, inside advantage in process measurement. If I were Intel with Hitachi etchers would I want Lam measuring the results? If KLAC were part of ASML there would be no bias on dep and etch providers. The bias against Nikon and Canon is almost meaningless as they are no longer competitive in the litho space as ASML owns the litho market anyway and no amount of bias is going to alter that.
The financial means and reward.....
ASML obviously has even more financial means than Lam and could easily bid a stupid amount of money as their stock is the most highly valued in the industry by a wide margin. Put KLAC's revenue and earnings into ASML's price to sale and price to earnings valuation and you get a number way bigger than what Lam bid. A slam dunk from a financial perspective (and not too shabby for KLAC shareholders...)
Putting it together...
ASML has the financial and technology fit as well as regulatory reasons. It has the ways and means to do a deal....the question is the will to do a deal....
KLAC the stock....
If I were "arbing" this deal I wouldn't be closing out my position in KLAC just yet. We are far away from the fat lady singing and we likely will have plenty of time as this makes its way through regulators around the globe (as AMAT can attest to...). This may not be the last, final and best bid for KLAC. We think there is little downside in holding the position probably counterbalanced by higher upside beta at this point.
This has all the potential makings of another great soap opera that I can write about. Another three way love triangle with one maiden being the object of desire of three potential suitors while engaged to one.....with all sorts of side characters and plots.
As the late Yogi Berra said..."it ain't over til its over...."
Robert Maire
Semiconductor Advisors LLC
Nobody wants to be left standing alone at the high school dance and KLAC could be anyone's partner
KLAC and Lam have been dating and flirting for a while....
Its clear that much like the eventual Lam/Novellus merger a few years ago that Lam and KLA have been on more than a few dates. KLA buying Lam, a merger of equals then finally Lam buying KLA. Its a combination that makes sense to both sides and just needs the right circumstances to come to fruition.
The right circumstances presented themselves when the market caps of both companies crossed along with KLAC doing a gift giving recap and Lam amassing cash. The timing is also right as Lam had pretty much finished absorbing Novellus and KLAC could find nothing of interest to buy. So both sides didn't have a lot to do that would make sense and move the needle.
Martin Anstice is clearly on a mission while KLA is a conservative ATM. With KLA's stock swooning in the 50's due to a long weak period while Lam had shot up to $85 on a roll, the deal obviously made even more sense. We can only imagine that in the few weeks before the deal was announced there were likely some nervous conversations and perspiration as Lam's stock price fell off a cliff and looked like a straight shot to $60 on its way to joining KLA in the 50's. But a deal was crafted and agreed and announced and the stock bounced back half way and stopped at $75 where it is now.
Not a slam dunk despite zero overlap
The PR spin on the approval of the deal is essentially identical to what we heard on the AMAT/TEL. The company saying zero overlap means slam dunk, while in AMAT's case they said minimal overlap and slam dunk. While overlap may be the primary test in the US, the rest of the world has its own rulebook or lack of rulebook. We can be relatively assured that China with its $100B aspirations in the semiconductor industry are going to look at this deal as a slightly less obnoxious version of the AMAT/TEL deal furthering the US's dominance and virtual monopoly on chip manufacturing equipment. While Samsung and Intel may not be up in arms as they were with the AMAT deal, they will likely have their hand out for some concession to let the deal move ahead. Though in the end we think the deal gets done we think mid 2016 is overly optimistic and end of 2016 is more like it.
Plenty of time for someone else to step in or circumstances to change
What about AMAT?
We have to admit that our first reaction to the announcement of the AMAT/TEL deal was shock that AMAT didn't make a play for KLAC first. After all Gary Dickerson had been raised at KLA and buying the company would be poetic justice for many different reasons.
The obvious question that everyone will raise is what about AMAT's process control business. I would argue that if given the choice I would easily divest the Israeli , process control operations of AMAT to get my hands on KLAC if I were AMAT management. KLAC is far more dominant and makes much more sense. Its more synergistic and perhaps more importantly blocks Lam or ASML from getting their hands on this crown jewel in the industry. Bottom line, KLAC is worth jumping through hoops for.
A far off pirate operation?
AMAT's process control in Israel has been little more that a loose affiliate since its days as Opal and Orbot and with the departure of Dan Maydan and Sass Somekh perhaps not as close to the mother ship in the valley as one would hope to get maximum synergy (much like the skull and cross bones flag flown by the Mac group across the street from Apple headquarters).
KLAC is a quick drive across silicon valley from AMAT (roughly as far away as Lam is), speaks english, with similar culture, and we are sure Gary still knows the company quite well and could navigate his way around KLA blindfolded. Clearly a thousand times better than flying halfway around the world to either Japan or Israel to speak a different language with a different culture and try to get synergies and integrate the operations.....Sounds like a "no-brainer..."
The hair of the dog that bit you.....
If we are in AMAT's shoes we can take our defeat on the TEL acquisition and go off into a corner and reorganize our operations or double down and come out on the offensive, swinging. Buy something, buy anything as chip equipment properties that matter are getting fewer and further between. Stop Lam from buying KLAC.
One could argue that Lam buying KLAC is the most serious threat to AMAT in its history. Lam already dominates in etch, does well in dep and adding KLAC would have it dominate in process control as well, all of which would look better than AMATs current business configuration. If AMAT managed to get KLAC and divest its Israel operations, Lam would still be way behind and would have a hard time catching up as the rest of the available companies would not get Lam to parity let alone ahead.
Expensive but maybe worth it...
Obviously all this would not be either cheap or easy, but all good things come with a price and while TEL was comparatively cheap, it was cheap for a reason. Divesting current process control would be expensive but the resulting combination would be great. Divesting would allow AMAT to make the same "zero overlap" statement. Maybe doing a deal with KLAC would be worth all the remedies that everybody wanted on the TEL deal because the end result would have more value with less issues than the TEL deal.
Maybe at the very least it would cause Lam to pay more even if unsuccessful, and that in itself would be a success, which is better than watching it happen and doing nothing....
ASML has even more reason to buy KLAC than either Lam or AMAT???
Even more logical than the Cymer acquisition.....
ASML had correctly and successfully made the argument to the industry and regulators that it needed to buy Cymer to integrate and accelerate the efforts of developing an EUV light source that has proven to be extremely difficult even with the combined resources. This is despite the obvious conflicts with both Nikon and Canon. Had Cymer remained on its own we probably wouldn't even be at the 80 watts where we are today we would have been light years behind (pun intended...).
I can make the same and perhaps even better argument for ASML to buy KLAC...
Right now, KLAC has made it quite clear that the odds of it developing a critical EUV reticle inspection system are slim to zero. At a minimum it would take a $500M check that no one seems to want to pony up. Even that may not be enough...
What reticle inspection tool????
Once Lam gets KLAC the odds of an EUV reticle inspection tool happening become a negative number....essentially "fuhgeddaboudit...", even for all the money in the Netherlands. Why? Its simple....Lam has had huge benefit from the delay of EUV and has sold a lot of extra dep and etch tools for the multi patterning party that has gone on without EUV. Lam would be out of its mind to do anything to help or accelerate EUV.
Half baked alternatives....
While there are alternatives to EUV reticle inspection , such as the pellicle "pop top" or wafer inspection after print they fall well short of optimal, high volume production ready, solutions not very conducive to convincing chip companies to adopt EUV.
In short, ASML could get the key, enabling reticle inspection, by buying KLA and making it the priority it should be as it is almost as critical as the source technology it bought Cymer to get.
KLAC may fit ASML better than Lam...
Financially similar models....
One could also argue that KLAC is a better fit for ASML. They both are highly dominant in their respective markets, the number one by a wide margin. They both sport high margins as compared to the rest of the industry due to this positioning and mint money.
A great technology combination too..
In our view litho tends to drive the train of Moore's Law progress (perhaps with recent exceptions..) and process control/measurement is a close second in value to the industry. Putting together the litho with process control, would combine the two highest value processes especially given KLA's reticle inspection systems which are crucial to litho. A more synergistic, value added combination as compared to dep and etch.
Less regulatory conflicts???
ASML and regulators could easily argue that having KLAC as part of Lam could bias and conflict with chip makers ability to use other dep and etch providers such as AMAT, ASMI, TEL and Hitachi etc; as Lam dep and etch would have an unfair, inside advantage in process measurement. If I were Intel with Hitachi etchers would I want Lam measuring the results? If KLAC were part of ASML there would be no bias on dep and etch providers. The bias against Nikon and Canon is almost meaningless as they are no longer competitive in the litho space as ASML owns the litho market anyway and no amount of bias is going to alter that.
The financial means and reward.....
ASML obviously has even more financial means than Lam and could easily bid a stupid amount of money as their stock is the most highly valued in the industry by a wide margin. Put KLAC's revenue and earnings into ASML's price to sale and price to earnings valuation and you get a number way bigger than what Lam bid. A slam dunk from a financial perspective (and not too shabby for KLAC shareholders...)
Putting it together...
ASML has the financial and technology fit as well as regulatory reasons. It has the ways and means to do a deal....the question is the will to do a deal....
KLAC the stock....
If I were "arbing" this deal I wouldn't be closing out my position in KLAC just yet. We are far away from the fat lady singing and we likely will have plenty of time as this makes its way through regulators around the globe (as AMAT can attest to...). This may not be the last, final and best bid for KLAC. We think there is little downside in holding the position probably counterbalanced by higher upside beta at this point.
This has all the potential makings of another great soap opera that I can write about. Another three way love triangle with one maiden being the object of desire of three potential suitors while engaged to one.....with all sorts of side characters and plots.
As the late Yogi Berra said..."it ain't over til its over...."
Robert Maire
Semiconductor Advisors LLC
Last edited: