August Technology

( AUGT) remains very much in play despite the company's stock slipping to a two-and-a-half-month low Thursday and its insistence that it will merge with

Nanometrics

(NANO) - Get Report

.

August -- and its stock -- have been wrapped up for the past three months in a three-way takeover contest with semiconductor-equipment rivals Nanometrics,

Rudolph Technologies

(RTEC) - Get Report

and

KLA-Tencor

(KLAC) - Get Report

.

To recap: Bloomington, Minn.-based August agreed to merge with Nanometrics in a stock swap on Jan. 21 that values August at $7.11 a share, a 37% discount to August's current trading price of $11.34.

Flanders, N.J.-based Rudolph subsequently bid $2.16 a share in cash, up to $40 million, and 0.4955 a share of Rudolph stock, for a current August value of $8.48 a share, a 25% discount. KLA followed Rudolph with a bid of $11.50 a share in cash for August, a premium of 1.4%.

August shares closed Thursday at $11.34, marking the first time that August shares have traded beneath KLA's bid. August released its first-quarter financial results before the opening bell, and executives stated that they remain committed to merging with Milpitas, Calif.-based Nanometrics and are prepared to put the deal to a shareholder vote. The continuing allegiance to Nanometrics has investors scared that August is unwilling to entertain the other higher offers, both of which were unsolicited.

A major sticking point to negotiations, pushing forward, concerns a confidentiality agreement, which

Rudolph has signed, but which KLA has not. August is precluded from talking with rival bidders unless a confidentiality agreement equivalent to the one that Nanometrics inked is signed.

August CFO Stan Piekos said his company and Rudolph have exchanged information and begun discussions about Rudolph's original bid. He declined to provide other details.

As for San Jose, Calif.-based KLA, Piekos said there has been no headway. "We've provided KLA the same confidentiality agreement signed by Rudolph, and they have been unwilling to accept it," he said.

KLA executives were more forthcoming Thursday after they

released financial results as to why they hadn't signed the agreement.

"We are not ruling out any possibility of our options," said KLA Chief Executive Ken Schroeder. "A tender offer is an option that would be ruled out if we were to sign the

nondisclosure agreement."

Schroeder added that the confidentiality agreement is complicated and carries a number of restrictions, including hiring restrictions if a deal fails and a restriction on taking a higher offer directly to shareholders.

"What you get is access to some data in terms of due diligence, and we're just not sure the information we would get would be worthwhile to us giving up the ability to go to the shareholders and the ability to do business if the deal doesn't come through," Schroeder said.

Schroeder suggested that August and Nanometrics work out their own agreement to terminate the deal they have. The deal is currently held together by an $8.3 million breakup fee. "If they could agree to terminate

their merger plans, then we think this acquisition could move forward on a rapid pace, and it would eliminate all the indecision that everyone is facing at this particular time," Schroeder said.

This seems to indicate that KLA is prepared to wait until August has to approach its own shareholders about formally accepting a bid from Nanometrics that's well underwater. The likelihood of such a vote succeeding is probably not strong and would prolong the situation for another few months.

KLA appears willing to wait. It has the financial means to snap up August without making a blip on its financial statements, regardless of whether it pays cash or stock. Its bid is commonly viewed as a defensive play to keep August out of the hands of its rivals, but KLA would no doubt benefit from the technology that August is developing. And the company

has purchased 4.2% of August stock to prove its legitimacy as a suitor to August.

But one thing KLA hasn't done is bid against itself. Its bid has stood at $11.50 a share, although documents made public between the two companies show that KLA had considered bidding as much as $12 a share at one point.

One institutional investor in August shares has maintained that KLA

needs to pony up at least $15 a share to get this stock. For now, though, KLA's offer of $11.50 is a premium to where August shares are trading, a first during this takeover battle.