Today I will review Episode 4 of the podcast series "The Chip Warriors" by Craig Addison. I reviewed episode 2 last week, but for some reason, Episode 3 is unavailable. The series is very interesting because it gives a historical breakdown of the semiconductor industry.
Here is the link to Episode 4 "The Dealmakers". "The Chip Warriors" podcast is also available on Apple Podcasts and Spotify.
Disclaimer: The podcast does not belong to us. Craig Addison is its creator.
KLA and Tencor Deal
At the 2:18 time mark of the episode, the host mentions that the KLA - Tencor deal was the most successful merger in the semiconductor industry. I want to briefly examine why this was a successful deal because it can help us understand what a good merger looks like.
The deal was announced in January 1997, which was a few months before Tencor's annual financial statements for 1996 were available. Using their 1995 annual numbers, along with reporting from the NYTimes and WSJ, the following insights can be gleaned:
According to the NYTimes article, KLA bought Tencor for $1.32 billion in an all-stock deal.
Both companies sold equipment that identified defects during the semiconductor manufacturing process. KLA owned 29% of the market and Tencor 11%. After the merger, KLA would own 40% of the market, and the next largest competitor would own 10%.
Tencor had great margins: 63% gross margins, 32% operating margins, and 20% net margins.
Below is Tencor's Annual Income Statement for 1996.
Key Takeaways from the KLA-Tencor Deal
KLA bought a profitable company that would increase their market share and margins because they could now sell more products to customers at a lower cost since they would eliminate redundant expenses at the merged enterprise. The chances of the merger being successful are high because both companies operate in the same market, and have similar customers, so the integration process should be smooth.
Lam Research and Novellus Deal
At the 11:43 time mark, the host mentioned Lam Research bought Novellus in 2012. A NYTimes article said the transaction was an all-stock deal for $3.3 billion.
According to Novellus' annual report that was released before the deal's announcement, Novellus was very profitable with 49% gross margins, 22% operating margins, and 19% net margins.
Below is Novellus Annual Income Statement for 2010.
The stock analyst in the NYTimes article mentioned this deal gave Lam Research more business with Intel and other top-level customers.
Key Takeaways from Lam Research- Novellus deal
Lam Research acquired a company that was profitable and had a great customer base. This deal made Lam more important in the industry because they could offer more products to their customers and reduce the risk of customers leaving them for a competitor.
Conclusion
Sometimes the difference between a great investor and a novice investor is the great investor knows which questions to ask when researching a potential investment. By analyzing successful deals, we can slowly develop our question bank over time.
The two deals we reviewed from Episode 4 gave us a good list of questions to ask when analyzing deals in the semiconductor industry.
Questions such as:
How profitable is the company being bought?
Is the merger between companies in the same market niche?
Can the merger realistically increase the margins of the companies?
How will the merger benefit the companies' existing customers?
What customers will the acquiring company gain access to through the merger?
How will the acquiring company's market share be impacted by the merger?
What are the backgrounds and personalities of the key people leading the merged companies? If the cultures and personalities of the companies are vastly different, the merger might be unsuccessful over time.
It is not necessary to have a perfect answer for each of the above questions. The main point is to ask these questions, so we can think intelligently about the merger being presented to us. Remember, one of the differences between a great investor and a novice is the great investor knows which questions to ask.
Stay strong, stay blessed, and God willing, I will see you next week.
Two are better than one, because they have a good return for their labor: If either of them falls down, one can help the other up. But pity anyone who falls and has no one to help them up.
Ecclesiastes 4:9-10 NIV
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