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Licence to print money

20 July 2016 By Dominic Elliott

Dutch microchip printer maker ASML could be an analogue to takeover target ARM if two of tech’s biggest ideas merit the hype. Japan’s SoftBank has agreed to pay 24.3 billion pounds ($32 billion) for UK chip designer ARM on the basis that it will be a prime beneficiary of “the internet of things”, where appliances chat to one another over the worldwide web. That in turn should create masses of “big data” that companies can crunch to learn more about their customers. And that is where ASML, which beat analyst expectations of second-quarter earnings on July 20, comes in.

ASML’s printing machines make chips smaller and more powerful. It is pioneering so-called extreme ultraviolet tools, which would allow Moore’s Law – a rule of thumb that chips tend to halve in size roughly every two years – to hold true for a while longer. For investors, ASML is a bet on when this new tech might be available, and there are now encouraging signs. It received several orders for prototypes in the second quarter and expects more next year. They could be ready for commercial use in two to three years’ time.

Both ARM and ASML are niche players, but dominant ones. Yet ASML would be harder to buy, even for a bidder that shared SoftBank founder Masayoshi Son’s tech euphoria. Funds owned by U.S. fund manager Capital Group collectively own just under 20 percent of ASML, according to Eikon. Intel owns almost as much following a three-way agreement by the U.S. chipmaker and other ASML customers Taiwan Semiconductor Manufacturing Company and Samsung to invest in the Dutch company’s R&D. Nor is it cheap: ASML trades at a forward price-to-earnings multiple of 25, higher than all European peers bar ARM.

Son’s boldness could prove infectious, nonetheless. Yes, a bidder for the Dutch company would be banking more on hope than substance. It’s also a bigger company than ARM with a market cap of 41 billion euros ($45 billion). But if the internet of things and big data come up trumps, ASML investors could gain whether the company sells its products, or sells itself.


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