August Tech Stretches Selling Points

It now says share prices support its Rudolph deal, but investors seem willing to wait.
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August Technology

(AUGT)

management pushes the idea that momentum is on its side as shareholders continue to warm to a merger with

Rudolph Technologies

(RTEC) - Get Report

, its own stock suggests an anticipation of another round of bidding.

During an earnings conference call on Wednesday, August CFO Stan Piekos cited the increasing stock prices of Rudolph and August during the past month as indications of investor acceptance of the present deal, as well as a "growing base" of institutional shareholders that own shares in both companies.

Rudolph and August

agreed to merge a month ago in a stock-and-cash deal that valued August at $10.50 a share. Since that time, Rudolph shares have grown 16%, making each August share worth between $11.79 and $12.10, depending on the ratio of cash and stock used in a takeout.

Still, August shares continue to trade near $13, markedly above the proposed takeout range. Investors have held shares aloft due to a competing offer from

KLA-Tencor

(KLAC) - Get Report

, which has bid $11.50 a share in cash. The expectation is that another round of bidding will ultimately bring a premium to the current stock price.

August executives insisted, however, that a deal with Rudolph is the way of its future. "We're going to drive this thing home in early Q4," said Piekos. He says August and Rudolph will file a registration statement with the

SEC

in two weeks and shareholders will get a chance to vote on the deal early in the fourth quarter.

"We believe the intrinsic value of the new Rudolph as an industry consolidator is just beginning to be appreciated by the investor community," Piekos says.

He says institutional investors have been providing a favorable reception to meetings extolling the virtues of the current deal. "We believe they will be particularly supportive of this merger opportunity," Piekos says.

August and Rudolph shares are certainly up during the past month, but the gains are not far out of line with those of the entire Philadelphia Stock Exchange Semiconductor Sector index, which is up 12% during the same time frame. KLA-Tencor is up 10%.

However, what's markedly different is that August is now addressing the stock prices and how they positively reflect on a merger. The company had previously insisted that the merits of its deal with Rudolph were separate from where investors were valuing the companies.

When August and Rudolph first announced their deal, Piekos said future growth potential trumps present stock valuations: "Rather than look at price, which is something the market does, I'm looking at consideration that has a very significant equity component to it."

Indeed, August executives were holding to this point earlier this year when they were trying to push a deal with

Nanometrics

(NANO) - Get Report

, which was underwater for its duration and ultimately scuttled.

As for the holder of the highest bid, August management continued to dispute that KLA-Tencor really wanted to merge and was instead just trying to thwart its own merger plans. Management also threatened legal action if there is any "inappropriate interference" to its deal with Rudolph.

"We are concerned that others in the field may be best served by seeing a merger not get done here and we want to make sure we stop those inappropriate actions and move forward," Piekos says.

When asked to clarify what he meant by "inappropriate interference," Piekos chose to define his terms by what didn't happen when Rudolph and August came to mutual terms to combine forces. "The converse of

inappropriate interference is you can see what happens when two parties get together and sincerely talk and put together a vision and a game plan to move forward and merge."

Still central to any further movement with KLA-Tencor is KLA's reluctance to enter into a confidentiality agreement with Rudolph. KLA-Tencor has previously

said it doesn't want to do that because it would then be precluded from taking an offer directly to shareholders.

August management also had cited potential antitrust issues with KLA-Tencor, the world's seventh-largest chip-equipment company and the largest maker of inspection and metrology equipment. A combined Rudolph and August would create the fourth-largest inspection and metrology company.

However, KLA-Tencor received

clearance earlier this month from the Justice Deptartment that a takeover of August would not encounter antitrust hurdles. Piekos was nonplussed regarding the decision, stating that August was not "insincere" with investors regarding the regulatory issues but that there was instead "a difference in perception."

KLA-Tencor will likely have the next word later Thursday, when it reports financial results.