Lam Research Buys Novellus In $3.3B All-Stock Deal

The heavens shook.

Two of the world’s top chip equipment makers are combining in an all-stock deal this evening, as Lam Research (LRCX) announced it would purchase Novellus Systems (NVLS) for $3.3 billion, a sum that is 40% more than Novellus’s closing market cap today of $2.3 billion. The combined company will be called Lam Research Corp.

Novellus shares rose $3.55, or 10%, to $38.25 per share. Lam shares fell $1.17, or almost 3%, to $38.31.

Lam will give Novellus holders 1.125 shares of Lam stock for each Novellus share, for an effective price of $44.42 per Novellus share, based on Lam’s closing price during the regular session of $39.48.

With Street consensus projecting Novellus to earn $3.06 per share in profit this year, and $2.69 per share next year, that purchase price represents forward multiples of 14.5 and 16.5, respectively.

Lam shareholders will own 59% of the combined company, Novellus holders will own 41%.

The companies expect cost “synergies” of $100 million annually to be achieved by the end of 2013, and Lam said the deal will add to its earnings one year after the closing of the deal.

Lam also said that its board of directors approved a $1.6 billion stock repurchase program, to replace the existing program, which will be carried out over the next 12 months. Lam said the funding for the repurchase will come from the companies’ combined cash, resulting in an actual cash cost to Lam of 48% of the value of the repurchases.

Novellus had $736.5 million in cash and short-term investments at the end of the September quarter, against $379 million in senior convertible notes and other long-term debt.

Lam CEO Steve Newberry said Lam would benefit from Novellus’s capabilities for deposition and surface preparation. Nov! ellus CEO Rick Hill remarked, “We believe the combination of Lam and Novellus is great news for our customers, investors and employees. The complementary skills, technologies and product offerings of Lam and Novellus will create a strong platform for delivering innovative and cost-effective solutions.”

Newberry was already expected to turn over the reins to Lam’s COO, Martin Anstice, as of January 1st, and Anstice will run the combined company. Novellus COO, Timothy Archer, will be COO of the combined company. Lam’s CFO, Ernest Maddock, will remain CFO of the combined company.

Goldman Sachs advised Lam on the deal, while Merrill Lynch advised Novellus.

The deal is subject to approval by shareholders of both companies.

Lam is hosting a conference call that is just getting underway at 6:15 pm, Eastern time, and you can catch it here.

Update: Some of the other equipment makers are higher in late trading, with KLA-Tencor (KLAC) up $1.08, or 2%, at $47.30, and Applied Materials (AMAT) up 27 cents, or 2.6%, at $10.60.

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