LAM, KLA-Tencor Cancel $10.6 Billion Merger Deal

KLA-Tencor (KLAC) and Lam Research (LRCX) late Wednesday terminated their planned $10.6 billion merger due to snags securing antitrust approval from the U.S. Department of Justice.

"The parties decided it was not in the best interests of their respective stakeholders to continue pursuing the merger after the U.S. Department of Justice advised KLA-Tencor and Lam Research that it would not continue with a consent decree that the parties had been negotiating," the companies said in a prepared statement.

No termination fees will be payable by either KLA-Tencor or Lam Research.

The companies' ability to secure DOJ approval had been in doubt since August, when they warned that the merger wasn't likely to secure needed regulatory approvals before the Oct. 20 termination date contained in their merger agreement.

The August announcement sparked selloffs in both companies but Wednesday's cancellation caught the market by surprise anyway. KLA-Tencor shares had been rising since the end of September, climbing from $68.77 at the close of Sept. 29 to $71.21 Wednesday. The termination was announced after the market had closed. When announced Oct. 21, 2015 the deal valued KLA-Tencor at $67.02 per share. In late trading KLA-Tencor shares are down nearly 3% while Lam's are off less than 1%.

Lam supplies wafer fabrication equipment and services to the semiconductor industry and KLA-Tencor is a leading provider of inspection and measurement technologies. Although the companies had insisted they provide complementary services to semiconductor manufacturers and do not compete, there was concern among regulators because the combined company would serve 42% of the wafer fabrication market. Mergers between companies with complementary products often prompt antitrust enforcers to demand that the firms commit not to favor one customer over another.

The DOJ issued a statement on its reservations about the merger, which the agency said would have combined a leading supplier of semiconductor fabrication equipment with a leading supplier of metrology and inspection equipment, two technology segments that "are growing increasingly important to the successful development of semiconductor fabrication equipment and process technology."

According to Acting Assistant Attorney General Renata Hesse of the Justice Department's Antitrust Division, "The proposed transaction presented concerns about the ability of the merged firm to foreclose competitors' development of leading edge fabrication tools and process technology on a timely basis."

The DOJ said that acquiring KLA-Tencor's leading position in several metrology and inspection markets "could have created the potential for Lam Research to foreclose its competitors by reducing their timely access to key KLA-Tencor equipment and related services."

The DOJ said it cooperated with the Korean Fair Trade Commission, the Japanese Fair Trade Commission and China's Ministry of Commerce during its investigation.

The DOJ issued a second request for information extending its review of the deal in May but until the August announcement, Lam CEO Martin Brian Anstice had played down the antitrust threat to the deal.

During the company's July 27 fourth-quarter earnings call he continued to predict that the deal could close in mid-October and that the companies were well on their way to establishing the ground rules that the merged company will have to follow. "We are . . . codifying kind of the behavior that will be relevant to the company with the consent decree conversation," he said. "One part of that obviously is describing our commitment to the entire semiconductor ecosystem relative to availability, supply and support kind of [KLA-Tencor] products," he said.

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