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Rationale for the KLA-Tencor–Lam Research Merger

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This deal is about synergies and cost control

Consolidation is happening all over the tech industry. Lam Research (LRCX) and KLA-Tencor (KLAC) have a complementary product offering in that Lam Research is big in wafer processing and KLA-Tencor is big in process control. The KLA-Tencor–Lam Research merger is expected to be accretive to non-GAAP earnings during the first 12 months after closing, and the companies expect to realize $250 million in annualized cost synergies within the first 18–24 months after closing.

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As the smartphone, server, and personal computer markets mature, we are seeing slowing growth and excess capacity. Consolidation is occurring throughout the semiconductor space, and we have seen a spate of deals this year. The customers for semiconductor manufacturers and semiconductor equipment manufacturers are also consolidating.

Lam Research and KLA-Tencor mentioned that the transaction will accelerate innovation in the semiconductor industry. This statement is for the benefit of antitrust authorities, who have been concerned that all the consolidation in the sector will inhibit innovation. The usual concern of antitrust regulators —the ability to raise prices—is not as much of a concern in the tech space.

Management comments on the transaction

“The pairing of Lam Research and KLA-Tencor brings industry leadership in process and process control together, accelerating our capability to address our customers’ most difficult challenges as they scale to meet the market demands of lower power, higher performance, and smaller form factors,” said Martin Anstice, Lam’s president and chief executive officer. “Lam Research and KLA-Tencor’s shared commitment to collaboration and building strong customer trust, along with our respective track records of innovation, product leadership, and operational excellence, position us as a combined company to deliver the higher levels of technology differentiation and speed to solutions that are critical to our customers’ long-term success.”

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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