The KLA deal died due to fox guarding the hen house.
Fox can’t guard Hen House…
In an industry where there are relatively few widget makers and only one, very dominant, widget inspector, the thought of one of the widget makers buying the most crucial widget inspector obviously would be anti-competitive. Not only would the other widget makers complain but the widget buyers would also scream about how unfair it would be…..this has been our thesis about the central problem with the deal and we were correct.
- DOJ implies that KLAC is more important than LRCX
- DOJ conspired w/ Japan, Korea & China as we thought
Remedies don’t remedy the situation…
Whatever remedies that were discussed/proposed/agreed upon they were obviously not enough. We find the concept of data “firewalling” close to worthless in preventing the potential problems of the deal. A divestiture would have likely been too painful as would likely be the case with licensing. There are really not a lot of ways to effectively protect competition in this type of deal which meant not workable or at least agreeable solutions could be had.
Even the DOJ has figured out KLAC is more important than LRCX in semis
Which supports our view going forward of KLAC over LRCX
“Metrology and inspection technologies are growing increasingly important to the successful development of semiconductor fabrication equipment and process technology”
The DOJ figured out (obviously with help from others in the industry) that metrology and inspection are the key to process development. Process tools have slowed as decreases in pitch (node dimensions- measured in nano meters) have slowed due to multi-patterning and 3D stacking which reduce the need for rapid improvement in pattern dimensions. In fact current 3D NAND is fabricated on “trailing edge” pitch dimensions using primarily older dep and etch technology. The number of commodity/competitive etch and dep processes out of all dep and etch processes has increased which has increased competition and commoditization(which the DOJ likes..). Proof of this is Applied share gains against LRCX.
On the other hand, metrology and inspection remains a market very dominated by KLAC, as evidenced by its gross margins (only exceeded by the purely monopolistic ASML). Theres a lot less competition in this market and DOJ figured that out.
This clearly supports our view that KLAC has a much easier time coming out of this broken deal over the next few years than LRCX does as they have less ongoing competition than Lam.
Conspiring with the enemy…
We find it interesting that the DOJ pointed out that they essentially conspired with japan, China and Korea the three countries we previously identified as being problematic- Hitachi & TEL in Japan, ASMC and others in China and Samsung in Korea.
The deal was facing a very uphill battle as they were up against four aligned government agencies.
Makes Applied’s metrology/inspection more valuable…
This leaves Applied as the only significant company with strong positions in both process and inspection/metrology. Though still far from being in KLAC’s league, Applied continues to make strides. This leaves Applied in a better position.
Is KLAC untouchable?
It seems that there is essentially no way that KLAC can get together with a process company now given what just happened. The best it can do is try to round up smaller inspection/metrology companies which is going to be much harder to do as they are obviously way over the HSR trip wire in most markets.
The DOJ had helpIts clear that the DOJ had help from both other equipment makers as well as chip makers who opposed the deal. There may be some left over damage and hard feelings on the part of these affected parties which could impact LRCX and to a lesser extent, KLAC, going forward. However its not like customers are going to rush into the arms of Applied either. Obviously Lam got its wires crossed when it said it had the support of customers for the deal because its clear they were part of the complaint.
The DOJ thumps its chest and takes a victory lap…Although we will hear both Lam and KLA’s side of the story tomorrow on separate conference calls, the DOJ has already spoken its mind and pronounced its “victory” for competition.
We could also view this as a warning shot across the bow of other potential deals that its not just HSR “horizontal”overlap but “vertical” customer overlap that matters. Zero product overlap just doesn’t get automatic approval.
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