3_800x533_L_1412602648.jpg)
By Lehar Maan and Abhirup Roy
(Reuters) - Recuperating demand from chipmakers will soften the blow for chip-equipment maker Applied Materials Inc (NASDAQ:AMAT) after antitrust concerns scuttled its bid for Tokyo Electron Ltd.
Though not its desired outcome after more than 18 months of talks, Applied Materials as a standalone company will be better positioned to focus on its core businesses without the integration costs and distractions of a merger, analysts said.
Tokyo Electron, on the other hand, now faces rising research and development costs and even possible market share losses to its former suitor.
Santa Clara, California-based Applied Materials and Japan's Tokyo Electron announced on Monday that they had abandoned merger talks after it became clear that differences with the U.S. Justice Department could not be bridged.
The plan to merge came together in September 2013, when the rising cost of developing cutting-edge chips and a slowdown in semiconductor demand was forging alliances across the industry.
That picture has changed. Chip-equipment capital spending, down 11.6 percent in 2013, rose 16.4 percent last year, according to market research firm Gartner. Spending is expected to increase by 5.6 percent this year. (http://gtnr.it/1DWPlqo)
"We have high confidence in Applied Materials' standalone model given opportunities for market expansion, improved margin performance, cash generation and share buybacks, and a top-tier management team," KeyBanc Capital Markets analyst Weston Twigg said in a client note.
Still, the company will need to slash costs and may have to sell its low-margin solar business to boost its bottom line in the near term, analysts said.
The company's operating margin spiked to 17 percent in the fiscal year ended Oct. 26. But its business that makes equipment for fabricating solar wafers and cells managed an operating margin of just 5.4 percent.
Applied Materials declined to comment for this story.
Joseph Eshoo, vice-president at SIT Investment Associates, owner of about 2.1 million Applied Materials shares, noted that the company had managed to grow organically under CEO Gary Dickerson. "Even with the distraction of the merger still out there, they were still able to execute," Eshoo said.
Applied Materials' revenue rose 21 percent last fiscal year, reversing two years of decline. Analysts expect revenue to rise 8.5 percent this year, according to Thomson Reuters I/B/E/S.
Up to last Friday's close, Applied Materials shares had risen 45 percent since Dickerson took over on Sept. 1, 2013. The stock has fallen 8 percent since the deal was scrapped.