NEW YORK (
The last time we talked about
(AMAT - Get Report), shares of the semiconductor giant were (then) soaring following the company's all-stock deal to merge with
Tokyo Electron. The Street salivated over the idea that Applied Materials, the world's largest chip equipment maker with a $20 billion market cap, was joining forces with the world's third-largest rival in Tokyo Electron.
Even so, I didn't believe Applied Materials' risk/reward ratio was any more attractive than it was before the deal. At least not to the extent that it justified the 10% jump in the stock.
In the October article, I said:
"Applied Materials investors who are now bidding up these shares solely on the basis on this deal don't fully understanding the risks that still remain here. Not only must the company execute to synergize both operations, Lam Research (LRCX) and Ultratech (UTEK) are not going to just sit idle and allow Applied Materials to sort things out. And when you consider that the company just installed a new CEO in Gary Dickerson, the uncertainties begin to pile up."
At the time, investors reacted as if I was dousing their flame with misguided bearishness. But aside from the execution risks, Applied Materials was already suffering weak organic growth due to (among other things) fledgling order levels. For a stock that was already trading on high expectations (its P/E was 55 points higher than the industry average), the Street never could explain with any clarity what this deal achieved beyond Applied Materials picking off a rival.Arguments were raised that suggesting management was planting its feet even further in areas like China and Japan, where Applied Materials already generates close to 70% of its revenue. But these weren't exactly booming economies. Plus, given the sluggishness and the overall weakness in chip stocks due to slumping ASPs (average selling prices), management could have waited for a better timing. This deal did not fix the company's underlying operational deficits, either.