August, Nanometrics Talk Honeymoon
Through some nifty math,
August Technology
( AUGT) and
Nanometrics
(NANO) - Get Report
say their combined stock should be worth $42 a share by the end of 2006, if they are allowed to merge, according to a filing with the
Securities and Exchange Commission
late Monday.
The two semiconductor equipment companies' proposal of a friendly merger worth $153 million hasn't been well received by shareholders of either company. Further, the merger plans have been complicated by
subsequent, higher takeout bids for August Tech by
Rudolph Technologies
(RTEC) - Get Report
and
KLA-Tencor
(KLAC) - Get Report
.
Still, August Tech and Nanometrics are pushing forward with their plans. The value of the stock-swap transaction values August Tech shares at $7.63 -- a 36% discount to Tuesday's trading level of $11.88. Nanometrics shares are trading at $11.67, down 23% from late January when the merger was announced.
Monday's filing of a joint August Tech-Nanometrics prospectus marked the first substantial comments from the companies regarding the rationale for the combination. Executives from the two companies
have been adamant that their agreed-upon merger represents the best long-term option for shareholders -- regardless of where the shares currently trade. However, the reasoning behind those claims are hard for August Tech investors to swallow while higher alternative offers are on the table.
August Tech, based in Minneapolis, staked its worth on an analysis from investment bank Needham, which is serving as its financial adviser through this process. Adams Harkness is advising Milpitas, Calif.-based Nanometrics.
Nanometrics and August Tech see cross-selling opportunities and cost-cutting possibilities once they join forces. From this and current financial goals of Wall Street analysts, Needham predicted 2006 sales of $236.5 million and earnings of $2.14 a share. Using a price-to-earnings ratio of 20, the investment bank calculated a per-share value of $42.63. That would yield an equivalent per-share equity value of $27.28 in 2006 for August Tech shareholders based on the current exchange ratio for each August share of 0.6401 a share of Nanometrics.
August Tech management and Needham took a harder line against the proposal from Rudolph, which has offered $2.16 in cash, up to a total of $40 million, and 0.4955 a share of Rudolph common stock for each share of August, resulting in a per-share bid currently worth $9.57.
Management at August Tech stated, though, that it didn't see as many cross-selling opportunities or cost savings from a combination with Rudolph. Needham predicted 2006 combined earnings of 82 cents a share and, based on these assumptions, Needham arrived at a combined stock price in 2006 of $16.34, of which $10.25 would belong to August shareholders. The current consensus target on Wall Street has Rudolph, not including any potential acquisitions, earning 91 cents a share in 2006.
The same sort of analysis was done with KLA's all-cash bid of $11.50 a share. However, August Tech and Needham assumed an all-stock bid worth $11.50 and then lopped of $35.3 million in expected cost savings. Needham projected that KLA's and August's combined 2006 earnings would be $1.96 a share, even though the consensus 2006 target solely for KLA is $2.23, and it arrived at a 2006 stock price of $45.11, of which $10.83 would belong to August Tech shareholders.
The calculations in these instances clearly favor August Tech and Nanometrics, but shareholders haven't seen the logic behind this deal so far. Executives at both companies are expected to begin a road show soon to discuss why the deal continues to make sense and why shareholders should trust the idea of their combined share price advancing to lofty levels. But investors should take heart: August Tech and Nanometrics have already done the math.