Update: Silicon Valley Group Soars on Merger with ASML

Updated from 11:20 a.m. EDT

Shares of Silicon Valley Group (SVGI Quote) soared Monday after Dutch rival ASM Lithography Holding (ASML Quote) agreed to buy the microchip equipment-maker in a stock deal valued at $1.6 billion.

The combined company will be the world's largest producer of lithography equipment, used by semiconductor manufacturers to make microchips, with a combined market share of more than 40%. That puts it above the current leader, Tokyo-based Nikon Corp..

ASML, which had sales of $1.3 billion in 1999, said it will exchange 1.286 of its shares for each share of the San Jose-based Silicon Valley Group, which had sales of $474 million. in 1999.

Based on their closing share prices Friday, the deal gives Silicon Valley shareholders a premium of 58%.

After the deal was announced Monday, Silicon Valley's stock climbed as high as $37.63, a gain of 43%. But shares started to slip back by the end of the session to close at $33.69, still up $7.38 or 28% from Friday's closing price.

ASML, which is based in Veldhoven, said the acquisition will increase its earnings per share immediately -- a claim supported by analysts -- as net income would increase by 15% while the number of shares grew by just 10%. Still, its stock fell after the announcement to end the regular session down $2.44, or 7.5%, at $29.88 on Nasdaq.

Under the terms of the deal, which is expected to be completed during the first half of 2001, Silicon Valley will become a wholly-owned subsidiary of ASML and its shareholders will own 10% of the combined company.

Bigger Is Better

The companies said there was little overlap and the acquisition should have minimal impact on employment. ASML, which has its U.S. headquarters in Tempe, Ariz., has 3,700 employees.

ASML's chief executive, Doug Dunn, said the acquisition will make the combined company "even better positioned to deliver the most advanced semiconductor technology to the greatest number of customers worldwide."

Foremost among those new customers is Intel(INTC Quote), Silicon Valley's largest customer, accounting for more than 15% of the company's sales, according to analysts at Theodoor Gilissen Bankiers in Amsterdam. The firm said Intel's recent profit warning could pose a risk for Silicon Valley sales, though Intel has said it will not cut back on its capital expenditures.

"Intel has taken pretty much everything Silicon Valley has been able to manufacture in its lithography division," added Tia-Min Pang, an analyst at SG Cowen Securities.

But Pang sees that as affirmation of Silicon Valley's technical expertise -- something ASML is likely to benefit from. ASML outsources much of its business now so acquiring Silicon Valley, which manufactures all of its own products, would give the Dutch company its own in-house expertise Meanwhile, ASML should provide the infrastructure Silicon Valley lacks.

Theodoor Gilissen Bankiers agreed that the two companies have complementary skills. But while the firm said it sees the merits of a merger between the two photolithographic equipment providers, the timing of the deal prompted it to maintain a "sell" rating on ASM Lithography's stock.

Some Skepticism

"In a boom/bust environment for semiconductors we have seen most of the boom-cycle already," wrote analyst M. Molenaar in a morning note.

The criticism that ASML paid too much too late for Silicon Valley was echoed by analysts worldwide.

"We are currently 18 months into the latest semiconductor upcycle and we believe that this price and premium appears expensive for this stage in the cycle," wrote Commerzbank analysts in London in reaction to the news.

Commerzbank said it expected some weakness in ASML's share price after the announcement because of the high premium ASML offered to Silicon Valley shareholders and the lack of competitive interest in a bid from other rivals. The firm maintains a "hold" rating on ASML.

"The surprise really is that it (the acquisition) happened today," said SG Cowen's Pang. "Usually, mergers and acquisition activity happens in cyclical downturn, but we're in the middle of a pretty strong upturn. ASML paid more than they might have done at another time."

Happy Couple

ASML and Silicon Valley are both optimistic about continued growth in the sector.

"This merger fulfills our longstanding vision of possessing the size and resources necessary to meet the expected explosive growth in demand in the semiconductor industry," said Papken Der Torossian, the chief executive of Silicon Valley, in a statement.

Quoting figures provided by Dataquest, the companies said the lithography equipment sector is growing at a compounded annual rate of 30% and is expected to reach $7.7 billion by 2002.

But analysts at Theodoor Gilissen Bankiers are more cautious in their estimates. Citing a weakening PC market and the current enormous capital expenditure spending among semiconductor manufacturers, the firm said it expects expect total wafer equipment spending to level off or even start to decline in 2002 because of over supply.