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Applied Materials (AMAT) to Buy Kokusai Electric With New Offer

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Applied Materials Inc. (AMAT - Free Report) recently announced that it is willing to pay a higher amount to acquire Japan-based semiconductor device maker Kokusai Electric from an investment firm, namely KKR & Co Inc.

In 2019, Applied Materials agreed to acquire Kokusai Electric for approximately $2.2 billion. Now, the company has increased its bid to $3.5 billion, up 59% from the previous offer price.

The deal — which was earlier expected to close on Dec 30, 2020 — will now likely conclude on Mar 19, 2021, subject to regulatory clearance in China. Other approvals have already been cleared by the company.

Why the Bid Increase?

Over the past couple of years, the semiconductor market has seen demand surge for advanced chips, driven by 5G wireless and other new technologies.

Kokusai Electric is a producer of semiconductor manufacturing equipment. It focuses on batch processing systems, particularly memory wafers. Kokusai Electric has strong customer relationships, supply chain, and manufacturing capabilities in Japan as well as Asia. These systems complement Applied Materials’ portfolio in single-wafer processing systems.

The Kokusai deal would immediately give the company an access to Kokusai's thin-film deposition technology. Applied Materials already has dominance in chipmaking equipment and now, the required combination with Kokusai is expected to further cement its position in the equipment market to turn silicon wafers into chips.

Also, service is an important part of Applied Materials’ portfolio. It delivers key enabling technologies to logic and foundry customers, given well-differentiated products along with growing market share. The latest deal will likely increase Applied Materials’ global services business activity by adding Kokusai’s new processing technologies.

This acquisition is in sync with the company’s strategy of strengthening business by expanding in adjacent markets, particularly Asia. The merger of these two companies will create an equipment powerhouse with a huge range of products, services, solutions, customer breadth and scale.

Coming to financial benefits, the deal will be immediately accretive to Applied Materials’ adjusted earnings.

Consolidation Continues

Growing market opportunities and intensified competition have led to a recent wave of consolidation in the semiconductor space.

Over the last year, the industry has witnessed more than 30 mergers and acquisitions.

Last October, Advanced Micro Devices officially announced plans to buy chipmaker Xilinx in an all-stock $35-billion deal, which would add to the tidal wave of semiconductor consolidation that we have seen in 2020.

In September 2020, NVIDIA (NVDA - Free Report) entered into a definitive agreement to buy U.K.-based Arm Holdings in a deal valued at $40 billion. The transaction is anticipated to be immediately accretive to the graphic chip maker’s gross margin and earnings.

During second-quarter 2020, the industry witnessed two major merger and acquisition deals that have a combined worth of more than $60 billion. Last July, Analog Devices (ADI - Free Report) agreed to acquire Maxim Integrated Products (MXIM - Free Report) in an all-stock deal worth $20.9 billion. The transaction, which is expected to be completed in summer 2021, will be accretive to Analog’s earnings and provide cost synergies.

There is a possibility of more consolidation in the chip space as the necessity for scale, portfolio diversity and groundbreaking innovations has become evident in this increasingly competitive space.

Conclusion

Applied Materials is one of the world’s largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays, and solar photovoltaic cells as well as modules.

Given increasing complexity of semiconductors, the demand for its products and services should remain strong at any point in the business cycle.

We believe, Kokusai Electric’s new products, services and solutions compliment Applied Materials’ revenue base, and should drive the latter’s top as well as bottom-line growth.

Zacks Rank

Currently, Applied Materials has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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