Shares sink after US DoJ scuppers $30bn semiconductor merger

Shares in Japan's Tokyo Electron fell by 13 per cent on Tuesday morning, the biggest intraday drop in six years, after US regulators' competition concerns scuppered its planned merger with US rival Applied Materials.

The deal, which would have created a $30bn semiconductor equipment giant, collapsed late Monday Japan time, after markets there had closed.

It is the second big deal to fail because of US Department of Justice pressure in the past week following cable group Comcast's scrapping of its planned takeover of Time Warner Cable on Friday.

Shares in Applied Materials were likewise hit, down 8.4 per cent by close of trading in New York.

The failure of the ambitious trans-Pacific tie-up highlights how some of the most ambitious mergers in a recent wave of global dealmaking are unravelling because of regulatory concerns.

In a pair of statements released on Monday in Tokyo, the two companies said the DoJ had rejected their proposed remedies to protect competition.

"Based on the DoJ's position, Applied Materials and Tokyo Electron have determined that there is no realistic prospect for the completion of the merger," said the companies.

Applied Materials said it would buy back $3bn in shares, while Tokyo Electron said it would purchase up to Y120bn worth of stock.

The failure of the merger - first agreed more than 18 months ago - is likely to mean lower profit margins at Applied and Tokyo Electron but will benefit competitors such as Lam Research and customers such as Intel.

The number of players in semiconductor equipment, one of the world's most technologically demanding industries, has been falling as research and development costs increase and the pool of customers shrinks.

Only a small number of chipmakers - such as Intel, TSMC and Samsung - now operate at the cutting edge of semiconductor technology, giving them significant power over equipment suppliers.

A merger of Applied Materials, the largest company in the sector, with Tokyo Electron would have had about 25 per cent of the total equipment market. But it would have had market shares closer to 50 per cent for some tools, such as silicon etching machines, forming a near-duopoly with Lam Research.

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As part of the merger, Applied and Tokyo Electron would have moved its domicile to the Netherlands. Applied Materials estimated its effective tax rate would have fallen from 22 per cent to 17 per cent as a result.

The DoJ said remedies put forward by the companies to address its competition concerns had failed.

"The companies' decision to abandon this merger preserves competition for semiconductor manufacturing equipment," said acting assistant attorney general Renata Hesse. "The semiconductor industry is critically important to the American economy, and the proposed remedy would not have replaced the competition eliminated by the merger, particularly with respect to the development of equipment for next-generation semiconductors."

The proposed deal was part of a broader wave of consolidation among chipmakers and their suppliers. The largest came earlier this year when NXP and Freescale agreed to merge in a deal with an enterprise value of $40bn.

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