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Further delays in KLAM deal not a good omen

Further delays in KLAM deal not a good omen
by Robert Maire on 08-14-2016 at 4:00 pm

 Deal likely getting worse as time & remedies go by…
Just a couple of short weeks ago on the earnings conference call, Lam management was adamant about the KLAM deal getting done and done by the Oct 20th deadline. Martin Anstice, the CEO , went to great lengths to tell us that the deal was under control, was going to happen, was pro-competitive and has “zero overlap”, etc;..

Now the company is “walking back” those statements saying that the deal likely will not get done by Oct 20th

What happened in the last two weeks???
We wonder what happened over the last two weeks that precipitated the change in the story. Obviously it was some unanticipated events or perhaps further complications that will take more time. Clearly, the more time this takes, the worse the deal gets as regulators have more time to come up with issues and ask for more remedies. Getting bogged down is not a good thing at all…..just ask AMAT

An out of control process???
Given that the goal posts keep getting moved further out and now the goal posts have been moved out of the Oct 20th end zone it begs the question of wether or not the deal process is under control…. it seems not.

One would imagine that the investment bankers and lawyers on the deal should have a pretty good idea & experience of the overall process and timing but that does not appear to be the case as the company was forced to change stories in such a short time frame.

We called it…
In our last two notes on KLAC and LRCX we called into question both the timing and the costs of the deal and expressing our concerns…

Lam beats on EPS & Revs and good Q1 (Sept) guide

KLAC accelerates business into Q4 and where are we on the KLAM deal?

We were the only analyst that had correctly predicted the problems with the Applied/TEL deal and so far we have also been in the same position on the KLAM deal….

Most of the sell side remains overly cheery and positive and don’t see the myriad of potential issues. This is complex stuff with many angles and nothing should ever be assumed to be a “slam dunk”……

What will KLA do??? Ask for more money???
As we brought up in previous notes KLAC could either walk away or ask for more money as the “deal clock” runs out. We think it would be very reasonable for KLAC to ask for more money as their performance has been stellar and Lam needs the deal more now than when it was first announced. Lam can’t walk away from this deal as easily as AMAT could walk away from TEL.

As we previously pointed out we had been lightening up on the shares of LRCX based on deal issues and valuation but we would retain our position in KLAC as they are in the cat birds seat right now.

Kost Kreep…
In the end, this deal will not be as attractive as when it was first announced. The remedies are obviously worse than anticipated and we have the added risk of KLAC asking for more money or walking away at the 11th hour.

The extended negotiations are a clear indication that the remedy costs are too high otherwise Lam would have put this deal to bed a long time ago

Probability down to a bit over 50/50…
We still think the deal gets done though the costs are likely even worse than they were just two short weeks ago.

We are sure that the company will play down or excuse away any remedy issues as inconsequential but investors will now have to take a much closer look. The regulators have the upper hand and time is on their side and they can negotiate for a better deal.

We are sure that Samsung is pushing Korean regulators for 2 pounds of flesh and Japanese regulators are probably well aware of the “fox guarding the hen house ” problem from both TEL and Hitachi.

Better Street management needed…
Expectations of the deal need to be better managed as the rapid changes do not instill confidence. Stop using the term “zero overlap” as that has little to do with regulatory approval. “Outer Limits” is an old TV show and not the drop dead date of the deal. Its also clear from many industry sources that customers are not universally in love with the deal and to call it “pro-competitive” is a stretch.

Our guess is that the November analyst meeting will have to be pushed out (and should be pushed out) as the deal will either not be done or there will not be enough time to get a coherent story together.

The stocks…
We would not be owning LRCX right now but would hold on to our KLAC. As previously mentioned a strangle option play may work given the current instability in the story and thus the stock.

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