RBC Analyst Expects Lam-KLA Tencor Merger To Be Approved

• Shares of both Lam Research Corporation LRCX and KLA-Tencor Corp KLAC are down 9 percent year-to-date.
• RBC Capital Markets’ Mahesh Sanganeria has an Underperform rating on Lam Research and a Sector Perform rating on KLA-Tencor.
• The merger between the two companies is prudent and is likely to receive regulatory approval, Sanganeria said.

Lam Research has entered into a definitive agreement to acquire KLA-Tencor in a cash and stock transaction. KLA-Tencor’s shareholders have the option to elect for an all-cash, all-stock or mixed deal for each share they own. The deal is worth $32 cash and 0.5 of Lam Research common share for each share of KLA-Tencor.

Based on KLA-Tencor’s closing price on October 20, the deal values the company at $10.6 billion, or $67.02 per share, representing a 24 premium to KLA-Tencor’s closing price.

Lam Research expects to the acquisition, expected to close in mid-2016, to be accretive to its non-GAAP EPS and free cash flow during the first 12 months of close. The combined company is expected to generate approximately $250 million in annualized pre-tax cost synergies within 18-24 months of close, and realize $600 million in annual revenue synergies by 2020.

Analyst Mahesh Sanganeria considers the merger agreement as “prudent” in view of the significant consolidation in the semiconductor space. “The companies have no overlapping product and we expect regulatory approval without any issues,” he added.

Sanganeria commented that the earnings of the merged entity would be less volatile on account of “a more normalized exposure” to the memory and logic segment.

“While we maintain our near-term cyclical concern, we believe the combined company will emerge stronger and in a better position to compete with Applied Materials as the size of the combined company and AMAT become comparable in the next cycle,” the analyst stated.

Lam Research reported its September quarter revenue in-line with expectation, while beating EPS estimates. It has guided to below-consensus December quarter shipment. KLA-Tencor reported its September quarter revenue and EPS ahead of expectations. It has not provided guidance for the December quarter.

RBC Capital Markets has a price target of $52 for Lam Research and of $51 for KLA-Tencor.