August Technology( AUGT) has endured another rough week, and the near term doesn't look any easier.
The chip-equipment company watched the stock of
tumble again, further slicing the value of its friendly stock-swap merger agreement made on Jan. 21, to $7.67 a share -- a 34% discount to August's closing price on Thursday of $11.69. This seems to be further indication that the deal -- held together by a mere $8.3 million breakup fee -- won't get done.
While August has two sweeter -- but still underwater -- options to consider, with
both entering the takeover mix, management is in the unenviable position of having to embrace a deal rebuffed by the market with two better offers on the table.
August CEO Jeff O'Dell
has been sticking by Nanometrics, stating that his team looked at no fewer than 10 external growth alternatives in the past 18 months and found that the Nanometrics transaction offers a "path to more rapid near-term growth and, consequently, enhanced August Technology shareholder value," he said in a conference call last week.
The upside to the merger with Nanometrics was that it represented a good fit strategically: there was no product overlap, the geographic sums would be stronger than the parts, and the service operations of the two players would combine to cover the globe.
However, August shareholder reaction to the Nanometrics announcement was swift and unequivocal, as the stock immediately sold off.
Rudolph stepped in on Jan. 27 with an offer of $10.50 a share, consisting of $2.16 a share in cash and the rest in Rudolph stock. August shares jumped 18% the following day to close at $9.55.
For Rudolph, buying August also would pay off strategically. There would be some product overlap in macro defect inspection, but Rudolph would gain a better presence into the back-end semiconductor packaging arena. Perhaps more importantly, the combination of the two companies would make a more formidable competitor to KLA, which trumps Nanometrics and Rudolph combined.
This, of course, wasn't lost on KLA, which
entered the fray on Feb. 9 with an all-cash offer of $11.50 a share, pushing August shares up another 15%. Altogether, August shares are up 62% since Rudolph and KLA stepped in with their offers.
Some investors say the main strategy behind KLA's move is to keep its competitors from getting August's technology.
"KLA is in this defensively, but with $2 billion in the bank, if they want it, they will get it," said a major institutional holder of August shares, who requested anonymity.
Not that KLA isn't as serious about its bid as Nanometrics and Rudolph. Indeed, he said KLA has already retained a proxy firm. Still, he didn't think KLA's offer of $11.50 was totally sincere.
"It's a joke and management knows it," he said. "There's no way I sell my stock to KLA at $11.50. August is at trough revenue in front of a huge product cycle. That's giving my stock away at the bottom of a cycle."
The institutional holder pegs a more feasible takeout price at no less than $15 a share. Plus, he says, the relatively weak share prices of both Nanometrics and Rudolph represent a depressed currency, which enables current August shareholders a chance at a sizeable run-up on those shares in the future.
He expects August management to do right by its shareholders, but believes they really want to merge with Nanometrics. If the current swap ratio can't be improved, he said management would probably be more amenable to joining with Rudolph, but that there remains an aversion to KLA.
Analyst Suresh Balaraman with ThinkEquity Partners also isn't ready to count out Rudolph. He pointed out that Rudolph shares are up 7% to $18.07 since its cash-and-stock offer, making its bid almost equal to KLA's. "It's not clear yet that KLA will win this bet," he said.
For its part, August has requested Rudolph and KLA both enter into confidentiality agreements to further explore their offers. August also told KLA that its all-cash offer might be more appealing if it was a stock package. Still, August and Nanometrics have stated they are pushing ahead with the merger and that a joint proxy prospectus should be filed with the
Securities and Exchange Commission
on March 1.
However, it isn't changing the image of Nanometrics looking more like an outside player, as its original bid sits in the shadow of the two latter offers. Nanometrics CEO John Heaton seemed to acknowledge as much this week during a conference call on Wednesday, when he noted the possibility of adding the $8.3 million breakup fee to the company's coffers.
"Going forward, it's a great situation for our shareholders no matter what happens," Heaton said.