Semiconductor manufacturing equipment suppliers Applied Materials Inc. and Tokyo Electron Ltd. (TEL) agreed to terminate their proposed merger after the U.S. Dept. of Justice (DoJ) indicated its intention to oppose the deal.
Applied (Santa Clara, Calif.) says the DoJ advised the companies that a proposal by the companies would not be sufficient to replace the competition that would be lost from the merger.
Applied and TEL have been two of the largest semiconductor equipment vendors in the world for more than two decades and market competing tools across a number of chip manufacturing process steps. A number of industry observers felt that the $10 billion deal—announced in September 2013—could be blocked by regulators.
The deal was originally expected to close in 2014. Late last year, the companies pushed back the expected close date due to scrutiny of the deal by several countries—including the U.S., Japan and China—holding it up.
Len JelinekLen Jelinek, senior director for semiconductor manufacturing at IHS Technology, said there were several issues that chip vendors had with the proposed merger, including the likelihood that many process tools already in the field would have become obsolete. In areas where Applied and TEL offer competing tools, it was unclear what support would be available for working tools that the combined company—which was to be known as Eteris—decided to drop.
“Historically, companies seek to have tools refurbished by the original vender with new software upgrades as well as hardware equipment upgrades,” Jelinek says. “The manufacturer always continues to enhance existing product lines. This merger would have resulted in a significant amount of tools reaching obsolesce with potentially no future support.”
But the biggest concern that chip companies had about the proposed merger, according to Jelinek, was the view that minimizing competition could result in significant price increases for tools. Applied and TEL compete with one another across numerous equipment lines, he says.
“With the merger, the competition would have been eliminated and the new company could have raised their prices to the manufacturers with really no recourse by the manufacturers but to pay the price,” Jelinek says.
While the cancellation of the merger is likely to have minimal effect on the semiconductor equipment market in the short term, the longer term ramifications are likely to be more significant, according to Jelinek. He expects both Applied and TEL to focus more narrowly on process technology in areas where they feel they have a competitive advantage, resulting in less direct competition between the two firms.
“This will help eliminate the companies bidding against each other, which was the key issue that initially drove the potential merger,” Jelinek says.
With the merger off, each company now has a better idea of the other’s strengths, Jenlinek says. Each will focus R&D efforts more on areas where they feel they have a competitive advantage over the other, he says.
Applied Materials CEO Gary Dickerson (left) and Tokyo Electron Chairman and CEO Tetsuro Higashi unveil the name of the proposed merged company in July 2014. Source: Applied Materials.
Jelinek predicts that the ultimate result will be increased tool pricing—the very thing that chip companies were afraid that the merger would results in. “As the two companies move away from competing against each other, they will raise prices in their areas of strength,” he says.
"We viewed the merger as an opportunity to accelerate our strategy and worked hard to make it happen," says Gary Dickerson, Applied president and CEO, in a statement.
Questions or comments on this story? Contact dylan.mcgrath@ihs.com
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