Is the KLA-Tencor–Lam Research Merger a Setup at These Levels?



Your biggest risk in this deal is probably timing

The risk-to-reward ratio of the KLA-Tencor–Lam Research merger is approximately 4x. That is generally a quite attractive risk-to-reward ratio.

That said, regulators can always be difficult, and they already blocked a deal in the semiconductor sector this year when they blocked the Applied Materials (AMAT) merger with Tokyo Electron. After nearly 18 months, the companies finally threw in the towel.

The merger agreement’s best efforts language is moderate. Lam Research (LRCX) doesn’t have to agree to any divestitures or behavioral restrictions that materially affect the deal, but it does have a $290 million reverse termination fee. As a general rule, a reverse termination fee is usually higher than the termination fee.

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While it is a stretch to say Lam Research has a low tolerance for divestitures, it does give you a ballpark idea of how far it is willing to go. At the end of the day, Lam Research and KLA-Tencor (KLAC) don’t name each other as competitors in their respective 10-k filings, but antitrust regulators are getting more aggressive regarding antitrust enforcement.

The companies are aiming for a June 2016 close, which is probably reasonable given there is a decent chance of a second request. Arbitrageurs who have this position set up will have a positive dividend carry, which compensates them for the timing risk.

Finally, Lam is not overpaying, at least from what we can see from comparative deals. We’ll have to wait for the proxy statement to get a read on KLA-Tencor’s sale process (if any).

Arbitrageurs will probably set this deal up but keep some powder dry in case the deal gets a second request.

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 Technology ETF (IXN).


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