Cheap versus year ago but expensive on fundementals – Net negative for KLAC/LRCX & AMAT. ASML bought Hermes Microvision for much the same reason as the Cymer acquisition – to support EUV. ASML could have made a counter offer for KLAC (as we had suggested previously) but this obviously would have been much more expensive and risky from a regulatory perspective (as Lam has found out).
So ASML did the next best thing and bought the competitor that had beat KLAC in the market..Hermes. Though the acquisition is expensive it is a strong strategic move to shore up support for EUV infrastructure which desperately needs help for what has become embarrassingly late and so fraught with issues such that is survival has been questioned.
Cheap and expensive at the same time…
Relative to the crazy stock price that Hermes had reached a year ago, the acquisition price at half the peak price seems cheap by comparison but you have to remember that the price is 15 times revenues not earnings. The PE multiple paid is closer to 50.
Investors need to recall that the Taiwanese exchange is over priced as compared to the US exchanges with lots of Taiwanese dollars chasing a limited pot of equities.
The same logic holds true for over priced European equities (of which ASML is one) where European investors have a lot of cash chasing after relatively few tech companies.
In short, it is one overvalued company , ASML, buying an even more overvalued company , Hermes Microvision at eye popping valuations versus US based companies.
KLAC forced the issue…
When KLAC dropped its EUV mask inspection program, ASML lost a huge, critical piece of much needed infrastructure to make its EUV tool viable. Lam’s acquisition of KLAC sealed this fate as LAM gets benefit from multi patterning at EUV’s expense, and will scatter the ashes of the EUV reticle inspection tool.
ASML had essentially no choice but to buy the only significant , viable, alternative EUV mask inspection/metrology tool company to keep the infrastructure alive and accelerate it.
As we had pointed out in many articles it has become clear that now, finally after source and power issues are getting resolved, the industry is finally waking up to the fact that there is not enough EUV infrastructure and this acquisition is meant to insure and accelerate that deficiency.
Negative for AMAT and KLAC/LRCX…
As a standalone company Hermes has a harder time competing with both AMAT and KLAC. AMAT has a significant E beam tool and KLAC recently released its 5th generation optical tools. But as part of the much larger and essentially monopolistic ASML, with limitless pockets and market leverage Hermes will do much better.
We are also sure that now that ASML has become a competitor , whatever semblance of working with AMAT and KLAC ever existing will quickly vanish as ASML will obviously only work with and push their own product and try to choke off the AMAT and KLAC competitive products.
ASML has a lot of muscle and leverage to do this and hurt both competitors in the process. Bundling litho tools with the purchase of inspection tools would give an unfair advantage in the market.
Speaking of unfair advantage…
Though at first blush most people would assume an easy regulatory approval for the combination given the lack of overlap (as with Lam and KLAC) but we would point to the near monopolistic position of ASML in the litho market and along with it would come an ability to restrict competition of currently competitive metrology/inspection tools.
As with the KLAM combination its not the overlap that counts but the anti-competitive potential that the deal brings. Given that the deal has to be approved in the US, we would not be surprised if it gets a second request much as KLAM has. Because the deal will also come at the 11th hour in the current administration which is already not corporate friendly even in the US and its involving two foreign companies, it may make it even tougher.
From KLAM’s perspective “whats good for the goose is good for the gander” or perhaps misery loves company.
The semiconductor M&A lint roller, rolls along…
As we had said earlier this year, and at our recent industry SEMI keynote speech in Albany, we see no reason for the M&A pace to slow down. Though this deal seems to be driven more by desperation and need rather than economics (especially at this high a price), we think there are still many reason for M&A to continue….there are a lot of companies still left to roll up.
Even though ASML is paying a high price relative to the industry and its own valuation, the strategic value likely overwhelms the financial value and thus is a near term positive. However we think that this acquisition alone will not significantly alter the odds of EUV’s success and ASML still has much work to do. This Hermes acquisition is not as core to EUV as Cymer was. Long and short, we think investors would and should like the combination as it no doubt will help ASML. We would caution that the “arb spread” could be wide as approval may not be as easy as most initially think.
Although this is a negative for AMAT and its E beam aspirations it is more of a negative for the KLAM merger. The merger is already likely less attractive as they will likely be some remedies to get the deal done which will have a cost associated. Now KLA’s core business will be under direct attack from a much larger company, ASML, supporting a smaller company, Hermes, that had already done significant damage to KLAC’s market share and leadership in metrology/inspection. KLAC’s “flub” of the Ebeam market continues to be one of the few missteps the company made but a costly one that keeps coming back to haunt it. This problem will now become Lam’s problem…