Semiconductor equipment companies

August Technology

( AUGT) and

Rudolph Technologies

(RTEC) - Get Report

on Monday finally entered into a confidentiality agreement and are discussing Rudolph's earlier takeover offer.

Shares of Flanders, N.J.-based Rudolph fell 3.2% to $15.01 on the announcement; August shares jumped 2.6% to $11.95 in midday trading. The agreement represents

a long-awaited development in a three-way merger battle for August.

August says that it is still proceeding with a plan to merge with


(NANO) - Get Report

, as originally announced on Jan. 21, but signing the confidentiality agreement allows it to hold discussions with Rudolph.

August's stock-swap deal with Nanometrics has not been well received by shareholders and currently values August shares at $7.61 a share, a 35% discount to its current trading price.

After the original agreement between August and Milpitas, Calif.-based Nanometrics, Rudolph bid $2.16 a share in cash, up to a total of $40 million, and 0.4955 a share of Rudolph stock for each share of August, resulting in a per-share bid currently worth $9.59.

Capital-equipment giant


(KLAC) - Get Report

, too, jumped into the fray after Rudolph, bidding $11.50 a share in cash, and was also rebuffed by August pending a confidentiality agreement, which has yet to be signed.

Rudolph's bid has suffered in recent weeks, as its stock price has dropped more than 20% from $18. Its bid was briefly worth more than KLA's, but the value of its bid has eroded along with its share price.

The confidentiality agreement comes a week after August and Nanometrics

filed a joint prospectus. In it, the two companies outlined for the first time the financial rationale for the combination. Despite the math behind the proposed combination, shareholders still aren't accepting of management's position.

Events are happening behind the scenes, however. August shuffled its top management late Thursday. President and COO David Klenk relinquished those titles to be the chief administrative officer at the Bloomington, Minn.-based company. Lynn Davis, partner of private-equity firm Tate Capital Partners, took over as president and COO.

Klenk now oversees human resources and organizational development, and focuses on merger integration plans with Nanometrics. Davis oversees manufacturing, engineering, sales and service, and marketing groups at August, but he was hired also for his experience with mergers and acquisitions.

August's deal with Nanometrics is still alive, helped by an $8.3 million break-up fee, but the confidentiality agreement is a key step in a possible higher offer for August. August executives have been adamant that the company isn't for sale and that its deal with Nanometrics represents the best long-term option for shareholders -- regardless of where the shares currently trade.

Now one of the rival bidders is getting a better look inside of August and its financial books. But don't look for KLA to fall behind Rudolph. KLA could be expected to shift its bid to an all-stock offer, and previous correspondence between August and KLA indicates that KLA is prepared to bid as much as $12 a share for August. Its bid will also likely be affected by developments that result from discussions between Rudolph and August.