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Consolidation in the Semiconductor Capital Equipment Industry
Over the past several months, the Semiconductor Capital Equipment Industry has experienced a bout of consolidation which is sure to change industry dynamics for years to come, and could well herald further takeovers in the sector. Indeed, the acquisition of Varian Semiconductor by Applied Materials (AMAT), and the pending takeover of Novellus Systems (NVLS) by Lam Research (LRCX), will have important implications for fellow producers of semiconductor fabrication products moving forward.
Given the growing global appetite for electronics, specifically high-performance mobile devices, demand for integrated circuits will likely remain robust for the foreseeable future. Consequently, companies which provide the equipment to make semiconductors stand to benefit substantially over the coming years.
That said, as is the case with most technology-oriented sectors, competition is fierce. Accordingly, it could well become the case that, over time, larger companies such as Applied Materials and Lam Research, which have the resources (i.e. adequate liquidity and R&D funding) and relationships (i.e. established contracts with major semiconductor companies) to produce the most up-to-date products, will outcompete (or buy out) their smaller counterparts.
The Time is Now?
In recent months, economic turmoil in Europe and the United States has caused a deterioration of short-term conditions for many companies in the semiconductor capital equipment industry, whereby semiconductor manufacturers have been pushing out orders and generally exercising more caution with their capital budgets. This, combined with recent market volatility, has left many semiconductor capital equipment companies with historically low stock valuations, making them attractive potential takeover targets.
Indeed, companies such as Rudolph Technologies (RTEC), Nanomentrics (NANO), Nova Measuring Instruments (NVMI), FSI International (FSII), and Ultratech (UTEK) might hold appeal as potential buys. Moreover, given the comparatively weak capital structures of most of these companies, combined with the industry’s highly cyclical nature, liquidity concerns could well come to fruition should the global economy take a turn for the worse. This is especially true in light of the scale and concurrent competitive advantage yielded by the two above-mentioned acquisitions.
Having said that, there are few companies remaining that have the scale and liquidity to actually engage in large-scale acquisitions. Following the above-mentioned deals, KLA-Tencor Corporation (KLAC), with a market cap of $8.5 billion at the time of this writing, is one of the few companies that has the potential resources to pursue a big deal. And while Applied and Lam could also remain active on the acquisition front, it will likely be on a smaller scale. On the other hand, two of the smaller above-mentioned companies could potentially tie up in a merger of equals, in a bid to compete with the bigger industry players.
No matter what the outcome, interesting times surely lie ahead for the semiconductor capital equipment industry. Furthermore, investors might be well-served to examine some of the above-mentioned companies in greater detail, in accordance with their risk-reward profiles, especially given the industry’s solid underlying fundamentals and historically low valuation.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.