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Lam, Novellus Merger Gets Govt. Nod

Zacks Equity Research

Following the receipt of regulatory approval, Lam Research Corp’s (LRCX) merger with Novellus Systems Inc. (:NVLS) will finally close after trading hours on June 4, 2012.

Both companies had already received their shareholder approvals for the deal on May 10. The merger will allow Novellus shareholders to receive 1.125 shares of Lam stock for each Novellus share.

Although initially priced at around $3.3 billion, the value has deteriorated slightly because of the nearly 7% decline in Lam’s prices since the deal was announced. With approximately 72 million shares outstanding at Novellus, the deal price has fallen to just under $3 billion at Lam's closing share price on Friday.

The agreement gives Lam shareholders a 59% share of the combined entity, which retains the name Lam Research Corp. The remaining 41% will go to Novellus shareholders. Additionally, Lam's CEO and president, Martin Anstice, will continue as the CEO of the merged operation.

Since both companies complement each other in many respects, we do not expect too many issues during the integration period. Most importantly, they sell complementary front-end equipment, wherein Novellus specializes in thin-film deposition and surface preparation equipment, while Lam is a leading provider of etching and cleaning equipment.

The merger would also enable significant cross-selling opportunities for both Novellus and Lam sales teams, driving penetration at existing customer accounts. Additionally, the acquisition will bring in cost synergies, mutually benefiting both the companies.

In the last reported quarter, Lam’s revenue was $659.0 million (up 12.8% sequentially) and earnings were above the Street consensus estimate by 6 cents due to better-than- expected expense control. The Novellus buyout will eliminate $100 million in costs a year (starting from the fourth quarter of 2013). The companies have also stated that the transaction would be accretive to non GAAP earnings within the first year after the deal closes.

Lam’s competitive position is also improving, with the company now moving to the fourth spot among semi equipment makers, behind Applied Materials (AMAT), Tokyo Electron and ASML Holding NV(ASML).

Lam Research has a Zacks Rank of #3, which translates into a Hold rating in the near term (1-3 months).

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