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Another busy year for M&As |
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Jan 08, 2007 at 03:00 PM |
Mergers and acquisitions were amongst the top stories of 2006, especially with respect to private equity firm activity within the semiconductor industry. Industry observers have already noted that more acquisitions of that kind are on the cards this year as these businesses are flush with cash and a keen number of investors.
However, it should also be noted that as this is probably the peak year in this current cycle, history says that merger and acquisition activity will also peak. Activity has already kicked off with the news that KLA-Tencor plans to acquire another metrology company in the form of Therma-Wave, and I doubt that this will be the last news of this kind in the sector this year.
It has long been known that the metrology market is highly fractionalized with KLA-Tencor being the dominant party. The majority of metrology equipment companies (over 20) are small and operate in niche markets. Therma-Wave is a typical example of this type of company.
As a result, many struggle to turn consistent profits and are more affected by the industry cycles due to the small customer base and product offerings. Though these types of companies are under pressure to constantly do well, the pressure rises significantly when the industry has had a very good year, such as we experienced in 2006.
The fact that 2007 looks like being slightly better than 2006 begs the question that if companies didn't do well in a good year, how will they do in a down-cycle? Investors in particular tend to run for cover when it is clear that a company has not done well in a year that should have seen a company produce good results.
Any equipment company under-performing in 2006 is a potential acquisition target, as valuations tend to be lower for these companies amongst their peers. Not only that, but management will often be looking for an acquirer to get them out of the mess. Therma-Wave is probably a good example of this.
Plus, we must not forget the other side of M&As, such as companies wanting to grow by acquisition or others needing to ‘bulk-up' to remain competitive, leading to an environment that results in a lot of M&A activity. Flush with cash from a good year, there is a buzz in the industry with a lot of cash floating about in 2007.
I would expect the metrology and DFM markets as well as the wafer-cleaning sector to see good M&A activity in 2007, as there are a lot of small niche players around. With the big wafer processing companies needing to bulk-up against Applied Materials, I would also expect good activity in that sector.
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