Global No. 1 (Applied Materials) and No. 3 (Tokyo Electron) plan merger
Subject to regulatory approval in different jurisdictions
Global No. 1 (Applied Materials) and No. 3 (Tokyo Electron) semiconductor manufacturing equipment makers on September 24, 2013 announced their “merger of equals” – creating a company with a nominal market capitalization of US$ 31.5 Billion, in one of the largest mergers of a Japanese company with a foreign company ever. I was this morning interviewed by BBC to comment – here additional background material and comments.
Summary of the Tokyo Electron & Applied Materials merger:
A new company will be created:
combined market capitalization of US$ 31 billion and about 24% market share
dual headquarters in Tokyo and Santa Clara, incorporated in The Netherlands
Chairman=Tetsuro Higashi (Tokyo Electron)
CEO=Gary Dickerson (Applied Materials)
CFO=Bob Halliday (Applied Materials)
ownership – corresponds almost exactly to the market capitalization ratio:
68% Applied Materials shareholders
32% Tokyo Electron shareholders
Anti-trust approval still outstanding:
Anti-trust authorities in several jurisdictions are likely to examine this planned merger, however it seems likely that there will be no major problems, since the product portfolios of both companies are quite complementary.
Currently Applied Materials has about 14% market share of semiconductor manufacturing equipment and Tokyo electron about 10%, thus about 76% of the market are supplied by competitors.
Of course the “pricing power” of the combined company could increase in certain cases, which could be also a driving force for this merger.
Market shares of IC manufacturing equipment market pre merger
Applied Materials: US$ 5.5 billion (14.4%)
ASML: US$ 4.9 billion (12.8%)
Tokyo Electron: US$ 4.2 billion (11.1%)
Lam Research: US$ 2.8 billion (7.4%)
KLA-Tencor: US$ 2.5 billion (6.5%)
Market shares of IC manufacturing equipment market post merger
Applied Materials + Tokyo Electron: US$ 9.7 billion (25.5%)
ASML: US$ 4.9 billion (12.8%)
Lam Research: US$ 2.8 billion (7.4%)
KLA-Tencor: US$ 2.5 billion (6.5%)
“Merger of equals” – really?:
Yes and no. Ownership of the merged company is split between shareholders of Applied Materials (68%) and Tokyo Electron (32%) according to current market capitalization ratio, and both CEO and CFO will be from Applied Materials. This is a clear message to Japanese corporations that market capitalization does matter dramatically. As we have shown in previous posts, the market capitalization of Japanese electronics companies today is dramatically low (considering revenue size, the glorious past and future potential) – so in any similar merger “of equals” even Japanese electronics giants could be the junior partner. This point was also addressed in a recent presentation by Hiroshi Mikitani. These sensitive issues were extremely skillfully and successfully handled by Renault and Nissan. Carlos Ghosn has said in this context that he believes a full acquisition would not have been successful.
“One of the largest mergers between a Japanese and a foreign company” – if executed and successful
There is some confusion on this point in the news articles that I have seen. The current market capitalization of Tokyo Electron is approx. US$ 10.07 billion.
By far the largest acquisition of a Japanese company by a foreign company was the acquisition of the Japan Telecom Group by Vodafone. Since this acquisition was done (and later undone) by a large number of separate transactions, it is difficult to put a specific size on this acquisition. Our estimation is that this acquisition was on the order of US$ 20 billion or higher – and was not successful longterm, some reasons are outlined here.
Large scale acquisitions of Japanese companies by foreign companies include:
Japan Telecom Group acquisition by Vodafone (undone: now part of SoftBank)
Nikko Cordial acquisition by Citigroup (undone: now SMBC-Nikko)
Japan Leasing acquired by GE
Nissan Motor partnership with Renault (minority stake, not acquisition)
Applied Materials and Tokyo Electron – Tax:
Tokyo Electron + Applied Materials plan a joint holding company in The Netherlands. One reason is to have a neutral location following the spirit of “merger of equals”, but tax also plays a role:
Projected tax rate for new holding company on profits in The Netherlands: 17%
Current tax rate on profits for Applied Materials: 28%
Current tax rate on profits for Tokyo Electron: 37%
Applied Materials and Tokyo Electron – Cultural issues:
Not to be underestimated. In our view success of this merger is not guaranteed at all, and will depend to some extent to skillful management of the bridging cultural issues.
Our report on Japan’s electronics industries:
pdf file, approx. 235 pages, 100 figures
Register and receive an email with a link to a free trial version of our report on “Japan electronics industries” and our newsletters.
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Hiroshi Mikitani about how Japan should become more competitive
Hiroshi Mikitani: presentation of his new book = Competitiveness
Today Hiroshi Mikitani, Founder and Chairman of Rakuten, gave a talk at the Foreign Correspondents Club about his Japan Association of New Economy (JANE) and about his new book authored with his father entitled Competitiveness. Mikitani is also member of Prime Minister Abe’s Competitiveness Council.
Overall Mikitani explained some very reasonable sounding suggestions for changes towards overcoming Japan’s current 15 year stagnation. He made clear, that the No. 1 reason for Japan’s stagnation is not lack of technology or lack of innovation, but is due to insufficient quality of top managers/executives of Japanese companies. Therefore most of Mikitani’s suggestions for improvements focus on increasing the quality of top executives at Japanese companies both via education and also via bringing in more non-Japanese competition. Mikitani also emphasized his close relationship with Prime-Minister Abe, he mentioned having had dinner yesterday with Prime-Minister Abe, and expressed is confidence in Prime-Minister Abe’s abilities and his power to execute. One of the questions the audience asked during Q&A was that similar suggestions for improvements have been heard over many years, and asked whether this time these suggestions will be implemented.
Mikitani is Representative Director of the Japan Association of New Economy (JANE).
Japan Association of New Economy (JANE) has three focus areas:
Mikitani emphasizes that the major reason for Japan’s stagnation is not lack of innovation, but top management with low capability and no vision. – Japan’s No. 1 problem are Japan’s executives.
To increase the competitiveness of Japan:
Japan does not lack technology, but global business management capability and business innovation
Current system protects top management with low capability and no vision. Top management needs to be renewed.
Efficiency of industries must be increased via competition
Japan went 100% nuclear free since Monday, Sept. 16, 2013. When nuclear reactors will be restarted is totally unclear.
Kansai Electric Power (KEPCO) on Sunday Sept 15, 2013 at 16:40 started to reduce power output of Japan’s last remaining active nuclear power reactor (Oi No. 4 reactor), and stopped operations of this reactor on Monday Sept 16, 2013 morning.
Since Monday September 16, 2013 Japan is nuclear free, and will remain so for the foreseeable future. It is unclear currently, when and if nuclear power will be restarted again in Japan.
Japan is strongly polarized over nuclear power
The reason Japan is currently nuclear free is not a policy decision by the Government of Japan or the Prime-Minister, the reason is mainly technical and a consequence of Japanese local politics:
Japan’s nuclear reactors are stopped every 13 months for checks, cannot be restarted in the current political and legal climate
Japan’s nuclear reactors are switched off for routine maintenance and security checks once every 13 months. In order to restart each reactor after this periodic maintenance both Japan’s nuclear safety agency, and also “the local community” have to give their formal agreements. Before the Fukushima disaster, both these two agreements were a formality and given quickly. Since the Fukushima disaster however, the approval by the newly formed Nuclear Safety Agency has been a far higher barrier to overcome.
However, more importantly, it has turned out that “the local community” who’s approval is also necessary is in some cases not well defined. Therefore many community authorities which in the past did not raise their voices, now join in the decision making process. In addition, some regional administrative leaders, such as the Governor of Niigata-ken, have expressed their very strong distrust in current management of nuclear power stations, and are refusing to give their agreement, without which the restart of nuclear power stations within the Prefecture they govern is impossible.
Nuclear power is mainly replaced by LNG
For the time being, nuclear power is replaced predominantly by electricity generation from Liquid Natural Gas (LNG). As a consequence Japan’s payments for LNG are at an all-time high.
Japan’s last operating nuclear reactor (No. 4 reactor at KEPCO’s Oi plant) was switched off on Monday, Sept 16, 2013. Since then Japan is nuclear free. It is unclear when nuclear power plants will be operated again in Japan.
In this newsletter David Uze, President for Japan & Korea of the global semiconductor electronics company Freescale, shares his success story in Japan, and his perspectives on Japan’s electronics industry sector….
Perspectives on Japan’s electronics sector by Freescale’s President for Japan & Korea, David Uze
Question (Gerhard Fasol): I have read several of your articles and interviews, and see that you express much optimism about Japan’s semiconductor industry. On the other hand, the retired Elpida-CEO Yukio Sakamoto said in an interview on Sept 5 in Nikkei, that the sale of Elpida to Micron was the best option for Elpida, while Renesas is also in a period of reconstruction.
How do you see Japan’s semiconductor sector, and where do you see its future?
Answer (David Uze): Japan’s semiconductor players have incredible IP portfolios. To not leverage such assets would clearly be missed opportunity for the Japanese economy.
Despite the pain and complexity of consolidation and restructuring, such actions usually force evolution. This leads to better product portfolios and the operational scale necessary to make the critical investments that fuel innovation. In the words of Friedrich Nietzsche, “What doesn’t kill you makes you stronger.” Similarly, in Japanese, “雨降って、地が固まる.” (in English: Rain makes the ground stronger).
Clearly, Japan will continue to be a chip design leader. Whether Japan returns to a prominent position in semiconductor manufacturing, relies largely on the priorities of the Japanese government and “Japan Inc.”
Question (Gerhard Fasol): At least until “Abenomics” and now the Olympic fever, a lot of companies globally are quite pessimistic about Japan’s growth. How do you see growth for your company in Japan? What do you feel about the future economic growth in the Japanese electronics sector?
Answer (David Uze): Freescale is working very hard to meet and exceed our Japanese customer’s expectation. Our belief and commitment to Japan is best embodied by the Japanese concept of being a “死に物狂い” partner to our customers (translation: a partner who never gives up, fights until death if necessary). Not a vendor. Our customers repeatedly tell me they want less “vendors” and more “true partners”. We are seeing business benefit from taking this path.
Japanese ingenuity and a technology savvy customer base has been and will continue to drive product innovation and ensure that Japan will remain a prominent player in the global marketplace.
Question (Gerhard Fasol): In my opinion, Japan has some incredible creativity – for example mobile internet which today is a major global growth industry, essentially was invented in Japan in 1999 by DoCoMo, KDDI and J-Phone, and Shuji Nakamura invented almost single handedly the GaN LED revolution which is revolutionizing the global lighting industry. How much R&D does Freescale do in Japan?
Answer (David Uze): In Japan, we have partnered with global technology leaders like Fuji Electric, Alps Electric and most recently Rohm Semiconductor. We continue to develop new technologies and solutions with these great companies and will expand our R&D partnerships in Japan.
Freescale is partnering with Tokyo University, software/hardware ecosystem partners and our customers in the automotive industry to develop solutions for next generation collision avoidance and other active safety applications.
Question (Gerhard Fasol): Tell us a bit more about your company Freescale if you like. What are your most exciting products now? Where would you like to drive your company in the future?
Answer (David Uze): Automotive makers/system suppliers and end-users are keenly interested in ADAS (advanced driver assistance systems), especially radar- and vision-based safety solutions. Freescale provides radar and logic chips for the most advanced safety solutions in the market. If your car has collision warning or parking assist features, they are likely based on Freescale technology.
Freescale has an intensely competitive culture. We won’t stop innovating and working to satisfy our customers until we are #1 in all market segments in which we participate. Of course, we won’t stop there.
Question (Gerhard Fasol): How big is your company in Japan now?
Answer (David Uze): Geographically, Freescale has offices in Tokyo, Nagoya and Sendai. Furthermore, we have extensive nationwide coverage via our excellent team of distribution partners including Avnet Internix, Marubun Corporation, Tokyo Electron Device and Toyota Tsusho Electronics as well as Chip-One-Stop as an e-tailer.
From a business scale perspective, Japan is one of Freescale’s largest and fastest growing markets. We have strong positions in Automotive and Digital Networking and are quickly expanding our footprint in Industrial and Consumer Electronics.
Question (Gerhard Fasol): Several times a week technology, software, energy, semiconductor companies approach my company with plans to enter Japan’s market, or to grow faster in Japan. What would be your most important advice to foreign technology companies thinking of entering Japan’s high-tech markets, or seeking to accelerate growth in Japan?
Answer (David Uze): Be sincere. Honor your commitments. Work hard.
Invitation to the races: The Asia Le Mans @ Fuji Speedway – international car racing event on September 20-22, 2013 free admission for all pre-registered Freescale guests
Question (Gerhard Fasol): You are holding a very interesting event at the Fuji Speedway on September 20-22. I know that you and Freescale are heavily engaged in R&D car racing. This sounds like a lot of fun, but there must be a very serious side also. Can you tell us why Freescale invests in car races, and what Freescale and Freescale customer get out of the car races?
Answer (David Uze): We are involved in Japan’s SuperGT racing series primarily to drive innovative R&D outcomes in automotive safety. Our focus is on contributing to a “Zero Fatality” vehicular future. Racing provides the most challenging environment for automotive systems due to the speed, vibration, g-forces and other environmental factors. Many revolutionary technologies have been borne from auto racing including; industrial utilization of the carbon fiber material, anti-lock brake systems, traction control, active suspension, seat belts and many other safety advancements.
Racing also provides a rallying point for our employees, partners and customers to work together as One Great Team (OGT!). We host 100’s of customers and partners during each race weekend where we have the opportunity to share ideas while fostering camaraderie. Off the track, our guests compete fiercely with one another. While at the track, they collaborate. This truly makes our Freescale OGT! Racing Program unique in both the racing industry and semiconductors.
Question (Gerhard Fasol): I heard you would like to invite our subscribers and readers to your Fuji Speedway event on Sept 20-22. Can you tell us a bit about what participants can expect, and how they can register?
Answer (David Uze): We’ll be offering very unique experiences to a broad range of people including current and future customers/partners, race fans, their families and even students. It is a combination of
David Uze invites our readers and subscribers to join the team for an exciting weekend of car racing at the legendary Fuji Speedway on September 20-22, 2013. You can have fun watching the races, attend a dance party hosted by musician & DJ Suzuki Ami and enjoy many fun family activities. This is also an opportunity to learn hands-on about the future of automotive technology and car electronics.
Details about the event and registration here: http://www.freescale.com/TheFreescaleExperience (日本語) http://www.freescale.com/webapp/sps/site/overview.jsp?code=DWF_TFE (English)