EUV Drives ASML to Acquire Cymer

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As the next step to accelerate the development and commercialization of EUV lithography tools, ASML Holding (ASML) has made a bid to acquire light sources provider Cymer (CYMI). When ASML roped in Intel (INTC), Samsung and Taiwan Semiconductor Manufacturing Company (TSM) earlier this year by selling a 23% stake in the company, we did wonder how this cash would be used. Since Cymer has been collaborating closely with ASML over the past year, the deal appears to make sense.

Except for the fact that ASML is paying a 60%+ premium to Cymer’s closing price on Monday, which fixes the deal value at around $2.5 billion ($20 cash and 1.1502 ASML shares per Cymer share). ASML investors were concerned, sending shares down 6.6% yesterday, although they started to stabilize after-hours.

ASML says that the deal would not be accretive for another two years, which coupled with the recent weakness in its results and outlook, also disappointed investors. However, it intends to run Cymer as a separate division based in the U.S., so we may be able to track the progress.

Cymer shares shot up 49.4%.

Why EUV acceleration is necessary

The chip industry has grown in accordance with Moore’s Law (simply put, this means a doubling in chip performance every two years). The law is named after Intel founder Gordon E. Moore, who was the first to notice the trend. It is now expected that performance enhancements (number of transistors per integrated circuit and higher speeds of the transistors) will slow down in 2013 and chip performance will double in three years instead of two.

This will slow down innovation, not only in the chip industry, but also many related industries, particularly computing and consumer electronics. With developed markets saturating and developing markets requiring lower price points, the only way to drive demand is by lowering costs.

However, cost reduction at the component level will only be possible when devices become smaller and more efficient. A failure to do this will lead to an inevitable drop in demand, which will in turn affect the semiconductor and related industries.

Semiconductor production has reached the stage where further innovation hinges on more advanced tools. This is the main reason that the companies are coming together to speed up research so these tools may be available at the earliest.

The EUV Roadmap

ASML provided some details in its press release. The company currently has 6 EUV systems (NXE: 3100) in beta, with satisfactory resolution performance at 22nm. However, the successor system, NXE: 3300B, which is intended for 14nm production currently requires closer integration with light sources to drive targeted levels of efficiency.

Joint laboratory testing of the NXE: 3300B by Cymer and ASML shows ability to process 18 wafers per hour. The companies intend to take this to 69 wafers per hour for 2014 chip production.

For this purpose, ASML intends to have 11 NXE: 3300B systems installed at customers for testing in 2013, with production-ready shipments at targeted efficiencies starting in 2014. The company has received four commitments so far and expects another four to eight in the next six months.

To Conclude

The deal should be cleared by regulators, despite certain anti-competitive concerns related to Nikkon (an ASML competitor) because of the value it creates in innovation.

We are currently neutral on the cyclical semiconductor sector, as enthusiasm for ongoing significant innovation for future growth is tempered by current low growth prospects.

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