Maybe buying

Silicon Valley Group

wasn't such a bright idea for

ASML

(ASML) - Get Report

after all.

After spending months cajoling regulators to approve the acquisition, ASML finally closed the purchase in May. But now the Dutch lithography company finds it has another battle on its hands: A forecast released Thursday shows that Silicon Valley Group is suffering from the order cancellations and delays that have plagued the entire U.S. semiconductor industry. Instead of adding to earnings, the new unit is hurting profits, and ASML doesn't expect a recovery this year. Further, the company said the delay in the merger's approval added to acquisition costs.

ASML shares dropped $1.42, or 6.4%, to $20.80 Thursday.

ASML said it expects to report a first-half loss of 95 million to 105 million euros ($79 million to $88 million), due entirely to the losses at the unit, which is now called ASML USA. ASML expects the unit's revenue to decline by more than 40% in the second quarter from the first quarter, a steeper drop than analysts expected.

Chip equipment makers like ASML USA have been hurt as their customers, semiconductor companies, have scaled back capital spending amid weak demand for products like personal computers and telecommunications gear.

Silicon Valley Group makes photolithography tools, which are used during the chip fabrication process. Its technology is also used by the military, which is why the U.S. government got involved in looking more closely at the merger. Announced in October, the merger was approved by shareholders in February and then went to the government for review. The merger closed in late May after the U.S. signed off on the deal.

But that delay has been costly.

ASM Lithography has ended up consolidating the group's financial results at a time when its profits have all but dried up. Back in October, Silicon Valley Group was coming off years of growth, and ASML said the purchase would be immediately accretive to earnings.

But the sharp decline in revenue for the unit -- it already had seen revenue fall 18% to $206 million during the first quarter -- means that Silicon Valley Group will post a loss for the first half of the year. The slowdown in the second quarter was so sharp that ASML says it now has inventories of obsolescent equipment worth $50 million.

And better days aren't right around the corner, either. In a statement, ASML President and Chief Executive Doug Dunn said, "On the market situation, recent comments from our customers about their Q2 and Q3 outlook lead us to believe that a market recovery in Q4 is more and more unlikely."

That viewpoint is one shared by Wall Street.

On Thursday,

Lehman Brothers

chip equipment analyst Edward White said that the firm's latest survey indicates semiconductor capital spending will decline 30% in 2001. In March, the firm expected that figure to drop 18%.

And the delay in signing off on the deal means other costs, both fiscal and political. It has said it will take a charge of 50 million euros for merger and acquisition costs, rather than the 40 million euros it had foreseen, due to the government-related delay. And then there's the politics.

The government's role in the purchase has been scrutinized in recent weeks, after an adviser of

President Bush

met with representatives of ASML customer

Intel

(INTC) - Get Report

. The adviser, Karl Rove, owns stock in Intel, which was lobbying for the merger's approval. The

House of Representatives

may hold hearings on the matter to determine if it created a conflict of interest for the adviser.

In any case, it may be a while before ASML shareholders are happy with their new Silicon Valley property.