Applied Materials: chips fall where they may

Even a huge share buyback is not always enough to please investors. Applied Materials, the US semiconductor equipment group, announced a $3bn repurchase plan on Monday. However, it was introduced to ease the sting of losing the $9bn acquisition of Tokyo Electron, disclosed at the same time. The companies concluded, 19 months after announcing their tie-up, that they could not satisfy the US Department of Justice, which believed the deal would reduce competition. Applied Materials shares lost 7 per cent on Monday, reducing its market value by nearly $2bn. Yet with a repurchase amounting to more than 10 per cent of the company's market capitalisation, and a decent industry outlook, Applied Materials may survive just fine.

From the start, the Applied Materials/Tokyo Electron deal was a bold play, combining two of the largest chip equipment makers. The larger US company would be acquiring a Japanese stalwart but the two pointed to the "spirit" of a merger-of-equals, making the deal more acceptable in Japan. After a stock swap, shareholders of Applied Materials would own 62 per cent of the company. The new company to be called Eteris, was then to reincorporate in the Netherlands where its tax rate of 17 per cent would be lower than Applied Materials' 22 per cent. By 2017, the pair said that cost savings would have totalled $500m or about 15 per cent of the combined company's operating expenses. Operating margin was to reach 25 per cent.

Those efficiencies sound wonderful in a spreadsheet. But achieving them across continents would have been tricky. And if there was a moment to lose out on a transaction, it might be now. Even after Monday's slide, Applied Materials shares are up a fifth from 19 months ago. Gartner estimates that the wafer fabrication equipment market size will be $39bn in 2018, 40 per cent greater than in 2013. Applied Materials' fiscal year 2014 operating margin nearly hit 20 per cent on its own, up from about 14 per cent just the year before.

Applied Materials still faces plenty of challenges. Semiconductors remain a notoriously cyclical industry. Consolidation among the company's chipmaking customers has picked up substantially in the last several months. But for now, a cheaper stock translates into a more effective buyback.

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