Today, the technology sector became involved as semiconductor equipment company Applied Materials (AMAT) announced that it is acquiring Japan-based Kokusai Electric for $2.2 bln in cash. News of the acquisition has shares of other semicap stocks, such as KLA Tencor (KLAC) and Lam Research (LRCX), pushing higher as investors speculate about whether more consolidation could be on the horizon.
AMAT is also trading higher because the financial implications of the acquisition look positive. The company expects the buy-out to be immediately accretive to earnings while also significantly expanding the company's market share in the semiconductor equipment market.
Kokusai is a leader in batch processing systems for memory, foundry, and logic customers. Batch processing (as opposed to single wafer processing) enables multiple wafers to be processed at the same time, improving cost efficiency and productivity.
The early stages of semiconductor processing require wafer cleaning and preparation. It's a highly-repeatable and easily controlled process that is ideal for batch processing. Since most of AMAT's technology revolves around single wafer processing, the addition of Kokusai diversifies its product line.
Kokusai is also a substantial company with an estimated $4 bln in revenue. That is large enough to move the needle for AMAT, which is expected to generate $14.5 bln in revenue this year.
What really stands out about the deal, however, is the price tag. AMAT only paid about 2x trailing twelve-month revenue, which looks like a bargain. The fact that the acquisition is still expected to be accretive even though Kokusai's gross margin is about half of AMAT's (low 20% vs. 43.5%) illustrates just how low the price is.
On the other hand, KKR unloading Kokusai at such a low price is little disconcerting since the private equity firm is essentially throwing in the towel. As has been well-documented, the slowdown in China and soft smartphone sales have recently sent the memory market plunging.
Furthermore, major chip companies like Broadcom (AVGO) and Micron (MU) commented during their recent earnings conference calls that the anticipated 2H19 recovery may not be in the cards. Instead, the rebound may not occur until 2020 as the industry continues to work through a supply-demand imbalance.
Key Takeaways: AMAT's acquisition makes sense from a financial and strategic standpoint. The company appears to have purchased Kokusai at a bargain price, providing a boost to earnings, while also diversifying its product line and expanding its market share.
However, the fact that KKR was willing to dump Kokusai at such a low price raises some eyebrows, especially since chip companies are less certain about a recovery in memory this year.