An Updated View On Lam Research And KLA-Tencor Following Termination Of Merger

Owing to regulatory hurdles, Lam Research Corporation LRCX and KLA-Tencor Corp KLAC have mutually agreed to terminate their proposed merger. The news does not come as a surprise, Citi’s Atif Malik said in a report.

Analyst Malik raised the price target for Lam Research to $108, while reducing the price target for KLA-Tencor to $70. He added that in the absence of the deal, Lam Research is preferred to KLA-Tencor.

Deal Falls Through

Regulators considered deal to be detrimental to competitors. The merged entity had the ability to “accelerate innovation and develop new technology that would not otherwise be able to be developed,” Malik noted. He added, however, that the new technology could potentially have a negative effect on Applied Materials, Inc. AMAT and Tokyo Electron TOELY.

Lam Preferred To KLA

With the deal being cancelled, there is an estimated upside of 12.5 percent in Lam Research’s shares on a standalone basis, since overall memory equipment spending is expected to rebound 16 percent y/y in 2017, backed by continued 3D NAND and rebound in DRAM investments, the analyst commented.

Lam Research has ~68 percent exposure to memory equipment and “its sales/earnings respond well in years in which memory sales grow,” the Citi report stated.

On the other hand, KLA-Tencor’s shares appear fully valued, with logic spending stabilizing or growing merely 2 percent in 2017. Malik added, “We think KLAC stock deserves a discount or 12x P/E vs. historical range of 7-13x peak EPS on declining long-term process control $ wallet share.”

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