Consolidation in the Struggling Semiconductor Industry

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Veldhoven, Netherlands-based semiconductor manufacturer ASML (NASDAQ: ASML) has extended a formal merger offer to San Diego-based Cymer (NASDAQ: CYMI) and established key details of the deal. The companies have agreed to merge in a cash-and-stock deal that values Cymer at roughly $2.6 billion. The merger offer applies to all shareholders of record as of January 7, 2013. Barring any unforeseen complications or legal challenges, the deal is scheduled to close on February 5, 2013.

About ASML and Cymer

ASML is one of the largest European players in the lithography niche of the semiconductor industry. The company's products aid in the manufacturing of integrated circuits, memory chips and various other semiconductors. Its primary products are classified under the "PAS 5500" umbrella and comprise wafer steppers, micro-manufacturing environments, and so-called step and scan systems. The company uses a number of cutting-edge technologies, including extreme-ultraviolet lithography and TWINSCAN static-free environments. ASML markets its products in North America, Asia and Europe. In 2011, the company earned $1.48 billion on $6.13 billion in gross revenues.

Cymer is a smaller semiconductor manufacturer that engages solely in the production and marketing of photo-lithography tools. Despite its modest size, Cymer is recognized as a key contributor to the global semiconductor industry. The company's products include extreme-ultraviolet scanners, "dry light" sources, silicon crystallization devices, various display components, low-temperature liquid crystal devices and LED components. It also manages a thriving aftermarket parts division that counts many technology companies among its clients. The company currently employs about 1,000 people and earned $53.43 million on $584.2 million in gross revenue in 2011.

How the deal is structured

The terms of this cash-and-stock deal are fairly straightforward. According to the release that it issued in mid-December of 2012, ASML is poised to offer cash payments of $20 per share to all current Cymer shareholders. In addition, each shareholder will receive 1.1502 ASML shares for every Cymer share that they own. Shareholders of record as of January 7, 2013 will be eligible to receive this consideration during the first week of February.

Given ASML's current valuation of about $74 per share, this values Cymer at approximately $105 per share. Relative to the company's pre-announcement closing price of $47.83 per share, this represents a premium of nearly 120 percent. Relative to its current closing price of $101.99, this represents a premium of roughly 3 percent. Due to natural fluctuations in ASML's share price, the value of this deal could change slightly before its closing date.

Thanks to a months-long rise in the share price of ASML, this deal's attractiveness continues to increase. During the weeks that followed the mid-October announcement of the initial agreement, Cymer's stock traded steadily higher. From its immediate post-deal highs of about $80 per share, the company's value has increased by over 25 percent. Current trends in the technology space support this movement and may further inflate the stock's value before its cancellation.

Complications and competition

Since Cymer manufactures products that directly compete with certain ASML devices, this deal is the focus of intense regulatory scrutiny. However, the semiconductor market is well-diversified and should be able to absorb this combination. Although it is possible that regulators could step in to bar the deal or change its terms, this outcome currently appears unlikely.

Given the deal's advanced timeline and attractive valuation, it also appears unlikely that a rival bidder will step in to disrupt the merger in the days before its close. Since Cymer is a fairly large company, the list of potential rival bidders is short. Intel (NASDAQ: INTC) would be one of the few companies that would not require significant amounts of leverage for such a deal. Intel has over $18 billion in cash on its balance sheet so it could easily buy the company in an all cash deal.  However, a deal between Intel and a semiconductor components manufacturer like Cymer would surely be subject to intense regulatory scrutiny. In fact, it is unlikely that such a combination would ever come to fruition. As such, the deal between ASML and Cymer looks likely to close as currently planned.

Long-term prospects and outlook

As a classic example of the benefits of vertical integration, the merger between ASML and Cymer looks poised to pay handsome long-term dividends. Aside from the massive short-term gains that Cymer shareholders have so far realized on the deal, current ASML shareholders stand to profit from this merger as well.

ASML's absorption of Cymer further increases its exposure to the rapidly-growing market for extreme-ultraviolet devices and establishes it as one of the most powerful LED manufacturers on the planet. Now that liquid-crystal and LED technologies are the de facto method of display in mobile computing, the newly-formed company will be in an enviable strategic position. At this point, solid profitability is a foregone conclusion.

With a favorable debt ratio and exposure to the world's most important computing markets, ASML may enjoy several years of healthy share-price growth. Investors who worry that they might miss out on the eye-popping premium that the company is paying for Cymer may still have time to grab some exposure to this merger. If ASML's share price should drop in the aftermath of the deal's closing, opportunistic investors should seize the opportunity and make targeted purchases.


mthiessen has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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