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

While no one was really paying attention, and the company didn’t have an earnings call anyway, KLAC put up a strong beat. Revenues came in at $919M versus street of $842M and EPS came in at $1.77 easily beating $1.42 street.

However this was at the expense of the September quarter as it appears that business in the September quarter was pulled into June leaving a bit of a hole in September (so far) We will see if business from December gets pulled into September

Kountdown to KLAM….
On the Lam conference call, management was very firm about the deal closing in October, which is when, coincidentally, the clock runs out (on Oct 20th).

We think that KLA’s strong performance likely increases the pressure on Lam to get the deal done. The combination of the two companies looks even better now than when it was first proposed given the strong results of both companies just reported.

Clock unlikely to be extended…
The boards of KLA and Lam could have pushed out the Oct 20th deadline on July 20th but didn’t do so. Pushing out the deadline for the deal would have given some breathing room for Lam management to get the difficult negotiation with regulators for remedies done. Instead we now have less than 90 days to get it wrapped up.

Could KLA get a better deal from Lam???
Maybe if I were on KLA’s board I would let the clock run down or out in order to get leverage to reset the deal to even better terms for KLA shareholders. Lam is very pregnant and needs to get the KLAM deal done more than AMAT needed to get the TEL deal done. This suggests that Lam would likely be willing to pay the price as the deal looks better with every quarter that passes. We don’t see Lam walking away as AMAT did….

Increased willingness to pay higher remedy costs???
With the deal clock running down Lam may be stuck paying higher remedies to regulators to get the deal done quickly before it times out. Because if the deal times out they will not only still have to deal with the remedies but also the potential of resetting the deal value with KLA….which obviously would make the deal less attractive for Lam shareholders.

We are sure that regulators aren’t stupid and know that Lam is up against a deadline and will likely use that as a lever in their favor to get a better deal.

Is a bad deal better than no deal? Probably yes…..
The KLAM deal would make the combined entity equal in size and better than Applied. Without it, Lam’s alternatives are not good as there aren’t that many good partners that can move the needle as much as KLA can.

Whatever the pain or cost in the short term will likely be worth it in the long term…
just keep calm and carry on

The stock…
We wonder if maybe we would want to put on a “straddle/strangle” trade on Lam as we get closer to Oct 20th as the volatility of the stock is likely to be very high, in both directions. Investors will likely ignore the remedy costs of the deal and just focus on wether the deal gets done or not (people will have to figure out the costs later on after the dust settles). We think there is minimally 10-15% of volatility either way.

To be clear, we do think the deal gets done but the costs may be higher than anticipated.