Federal Dig Snags Lam’s KLA Buy; Will China Cry Antitrust?
Chinese, Japanese and South Korean regulators could gum up Lam Research ‘s ( LRCX ) attempt to buy KLA-Tencor ( KLAC ) by following in the footsteps of the U.S. Department of Justice, which is asking for more information on the proposed merger, an analyst said Monday. Late Friday, the companies said the DOJ had sent a “second request,” digging deeper into Lam Research’s $10.6 billion plan to acquire KLA-Tencor. Only 2%-4% of merger proposals get a second request, Semiconductor Advisors president Robert Maire says. Of those, he says about a third go through as planned but the other two-thirds either get challenged by the DOJ or get a consent decree, which is approval with conditions. In the Lam-KLA deal, the likely concerns revolve around antitrust. Together, the companies would be close to matching the market cap of Applied Materials ( AMAT ), which is No. 2 among makers of chip manufacturing equipment, behind ASML ( ASML ). Also, together they could pressure etch pricing for major players like Intel ( INTC ) and Taiwan Semiconductor Manufacturing ( TSM ), the latter an Apple ( AAPL ) supplier. Tokyo Electron and Hitachi ( HTHIY ), which compete against Lam in etch, might oppose having KLA continuing to inspect their tools and processes. “While not good news, a second request is certainly not a death sentence for the merger, but at the very least (it) means more time and money and scrutiny to get approval,” Maire wrote in a research note. The 30-day clock for DOJ approval has now been reset. ‘Kitchen Sink Of Information’ In midday trading on the stock market today , Lam Research and KLA-Tencor stocks were down nearly 2% and 1.4%, respectively, both near three-month lows. IBD’s 34-company Electronic Semiconductor-Equipment industry group was down a small fraction midday Monday. Maire says the DOJ could “ask for the kitchen sink of information.” “The (second request) is not just a simple test of overlapping product lines,” he wrote. “It looks at things like market concentration and anti-competitive issues. (Lam-KLA) would certainly have a large concentration of the overall market.” The chip industry is most concerned about KLA’s standing as an “impartial arbiter” of others’ tools, he says. “Will Lam dep and etch tools get an unfair advantage? An early look at results? A more complete look?” Maire asked. “(It’s) kind of a lot like insider trading.” Lam and KLA already have the go-ahead from Germany, Ireland, Israel and Taiwan, but they still needs a slew of other foreign approvals. This DOJ action can “snowball into a problem” if it becomes too costly, Maire says. Applied Materials and Tokyo Electron called off their merger in the face of strong regulator scrutiny. DRAM Slowdown Hits Lam The request further delays the merger’s close, Needham analyst Y. Edwin Mok noted in a research report, saying he expects the deal to close in Q4, as opposed to the companies’ target for Q3. Western Digital ( WDC ) closed its $19 billion SanDisk acquisition last week, a merger that was announced within hours of the Lam-KLA match-up. Neither Mok nor Cowen analyst Timothy Arcuri worry about the Lam-KLA deal getting approval, however. In his report, Arcuri called the second request “more procedural in nature.” “There is no overlap here, and certain big customers have been pushing these companies together for several years, especially around the issue of yield ramp in 3D,” he wrote. “We continue to see the deal closing in (the) August time frame.” Arcuri cut his price target on Lam stock to 85 from 93. Lam and rival ASML recently indicated minor timing delays for DRAM (dynamic random-access memory)-related shipments, he wrote. Lam has guided shipments up for the second half of the year, but Arcuri isn’t that confident. “Weakness for Lam seems focused on the memory side, with some signs of a less aggressive 3D Nand (flash) shipment cadence to Toshiba, seemingly due more to capital constraints at this customer rather than any fundamental change in the 3D Nand ramp itself,” he wrote. But Samsung, SK Hynix, Micron ( MU ) and Intel Dalian haven’t experienced any mirrored slowdown, he wrote.