Applied Materials to Acquire Varian

MAY 4, 2011   THE WALL STREET JOURNAL

By GINA CHON And ANUPREETA DAS
Chip-equipment manufacturer Applied Materials Inc. on Wednesday agreed to acquire Varian Semiconductor Equipment Associates Inc. for about $5 billion in cash, betting that the demand for popular gadgets such as smart phones and energy-efficient technology will drive growth at a combined company.

Applied Materials, of Santa Clara, Calif., agreed to pay $63 a share for Varian, a 55% premium to Varian's price of $40.55 a share at 4 p.m. Tuesday on the Nasdaq Stock Market, giving it a market value of just over $3 billion.

Varian shares have climbed 23% during the past year, trading as high as $50.40. Applied Materials shares have climbed 11% in the past 52 weeks.

The transaction is one of the largest recent deals between companies that make equipment used in the manufacture of integrated circuits for electronic devices such as flat-screen TVs and solar panels. Applied Materials, with a market capitalization of more than $20 billion, supplies the highly specialized equipment used in making these chips, which are built on silicon wafers and contain components such as transistors.

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Varian designs and makes ion-implantation systems, which are used to build the transistors that are the basis of these chips. Chip-gear makers also manufacture the equipment used to cut individual chips from wafers and help in assembling and testing them.

In April, Varian, of Gloucester, Mass., said its second-quarter net income jumped to $82.3 million, compared with $38.6 million a year earlier. Revenue increased to $330 million, compared with $204 million a year earlier.

Given the cyclical nature of the chip-making industry, with periodic bouts of oversupply, chip-equipment companies have begun to hedge their bets in recent years, diversifying from making gear just for chips used in computers. One new area is the market for light-emitting-diode lighting, which is increasingly used in bulbs for home use, as well as for car-indicator lights, traffic signals and backlit commercial displays. LED lights, which are built on semiconductors, are considered more energy-efficient and longer-lasting than traditional lighting.
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With the economic recovery, chip-equipment makers are also expecting their chip-making customers to upgrade their manufacturing technology and capacity, driven by increasing demand for consumer gadgets. In January, Intel Corp. said it plans to spend $9 billion in capital expenditures this year, including for new equipment. Executives at Applied and Varian were both upbeat about the outlook for their industry during recent earnings calls.

Applied will pay nearly 14 times Varian's earnings before interest, taxes, depreciation and amortization, or Ebitda. The company's expected Ebitda for the 12-month period ending Sept. 30 is $367 million, according to estimates provided by Capital IQ.

Write to Gina Chon at gina.chon@wsj.com and Anupreeta Das at anupreeta.das@wsj.com