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Monday, 27 June 2016

Precision dealmaking

M&A diplomacy features in $29 bln tech deal

Applied Materials and Tokyo Electron have showcased M&A diplomacy in their $29 billion deal. The U.S.-based producer of semiconductor-making equipment heeded local sensitivities and ceded governance duties in the proposed acquisition of its Japanese rival. At the same time, most of the financial benefits will accrue to its own shareholders. The merger is a delicate inauguration of Abenomics-style corporate reform.

The financial and strategic rationales are clear. Microchip plants are steadily becoming larger and pricier to build and furnish, and manufacturing is increasingly dominated by a handful of specialists, leaving fewer customers for Applied Materials and Tokyo Electron. A combination should help swing pricing power back toward them. They also reckon that together they can make research and development more efficient. Tax efficiencies from incorporating in the Netherlands and $500 million of cost savings also add to the deal’s appeal.

Even so, cross-border transactions are tricky. It’s hard enough to get the so-called cultural aspects right in a domestic deal, let alone one involving two countries where the corporate ethos is so different.

Applied Materials is treading carefully. In the deal announcement, it first noted benefits to customers and employees. And while Tokyo Electron shareholders will end up with barely a one-third stake in the new company, it will appoint half the directors. Its chief executive will be chairman of the new company. What’s more, though the merged entity will be dual-listed, Applied Materials CEO Gary Dickerson will move to Tokyo to run the company.

Meanwhile, owners of the American company will be happy with the financial aspects and reap most of the benefits. Allowing Tokyo Electron to have a disproportionate share of governance means Applied Materials is only paying a small premium of about 6 percent to the Japanese company’s undisturbed share price, a value that is exceeded by the expected synergies.

There are additional reasons to anticipate success. Both companies are already solidly international. The two CEOs have known each other for 30 years. Dickerson can navigate his way from Akasaka to Akihabara, having been to the Land of the Rising Sun about 100 times by his tally. Ultimately, the deal seems to embody the sort of shakeup envisioned in the policies set out by Japanese Prime Minister Shinzo Abe. If other Western companies can bring themselves to negotiate so tactfully, Applied Materials may have provided a useful M&A blueprint.

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Applied Materials said on Sept. 24 that it would merge with Tokyo Electron in an all-stock deal that would create a company worth $29 billion.

Tokyo Electron shareholders would receive 3.25 shares in the newly combined company for each Tokyo Electron share, for a 32 percent stake, while shareholders of Applied Materials would receive a one-for-one swap for their shares. The merged entity will aim to buy back $3 billion of stock in the year following closure of the deal.

Applied Materials Chief Executive Gary Dickerson will become CEO of the combined company and move to Tokyo. Tokyo Electron Chief Executive Tetsuro Higashi will become chairman.

The company will maintain dual listings on the Nasdaq and Tokyo Stock Exchange.

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