Basics of the transaction
As we saw in the first part of this series, Lam Research (LRCX) is buying KLA-Tencor (KLAC) for a combination of cash and stock. The equity value of the transaction is about $10.6 billion using the closing price of Lam Research on October 20, the day before the deal was announced. Shareholders will receive $32 in cash and 0.5 shares of Lam Research for each share of KLA-Tencor they hold. Shareholders can also choose to receive all cash or all stock based on an averaging period before the deal closes, which is subject to proration.
The following conditions need to be satisfied in order for the KLA-Tencor–Lam Research merger to close:
- KLAC shareholder vote
- LRCX shareholder vote
- The Securities and Exchange Commission’s approval of the proxy statement
- LRCX’s filing of a PNR (premerger notification report) to comply with the Hart-Scott-Rodino Antitrust Improvements Act
- Any other foreign antitrust approvals (disclosed in the Company Disclosure Schedule, which is not public)
No-shop provision and breakup fees
KLAC has a no-shop provision with a “fiduciary out,” which means that it cannot talk to other potential purchasers while the transaction is pending. However, the “fiduciary out” does allow KLAC to talk to a bidder who makes an unsolicited approach if the Board of Directors believes such talks can lead to a bona fide superior offer.
If KLA-Tencor accepts a superior bid, it will owe Lam Research a termination fee of $290 million. If Lam Research gets a bid and terminates the deal with KLA-Tencor, it will owe KLAC $290 million. This termination fee also applies to Lam Research if the deal is rejected by regulators.
Merger arbitrage resources
Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and the merger between Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI). For a primer on risk arbitrage investing, read “Merger Arbitrage Must-Knows: A Key Guide for Investors.”
Investors who are interested in trading in the tech sector can look at the iShares Global Tech ETF (IXN).