Applied Materials made a bold move this week, snapping up Varian Semiconductor Equipment Associates for almost $5 billion in a deal that gives the world's largest chip-equipment maker a critical leg up on competitors building the gear used to make chips for smartphones and other electronic devices.
The $63-a-share price tag represents a 55 percent premium above the $41 a share Varian (NASDAQ: VSEA) was trading at prior to Wednesday's announcement.
Gloucester, Mass.-based Varian, which specializes in ion implementation equipment used to make complex chips found in devices like the iPhone and iPad, immediately gives Applied (NASDAQ: AMAT) a stronghold in a sector of the chip-equipment market that generates between $1.5 billion and $2 billion in annual sales.
That figure will only increase, analysts say, as manufacturers race to develop more and more mobile and small-form electronic devices to meet consumers' insatiable demand.
Long before the deal was announced, Morningstar analyst Andy Ng had assigned a four-star rating to the Applied's stock -- declaring it one of the firm's "best ideas" and establishing a fair value price of $22 a share. Applied is currently trading at just over $15 a share.
"We like Applied from a valuation perspective, and think the firm will benefit from market share gains," Ng wrote in a research note last week.
The Varian deal comes a little more than a month after chip giant Texas Instruments ponied up $6.5 billion for National Semiconductor, creating a semiconductor goliath and sparking what now appears to be the first wave of consolidation in the chip sector in more than a decade.
Applied CFO George Davis told analysts the deal will add about 8 cents a share in earnings to the company's bottom line this year. The company also believes the deal will help it trim $50 million to $60 million annually in materials costs.
"We have a very strong and established global supply chain, and we think there's going to be value that comes out of leveraging that," he said during a conference call with analysts.
Earlier this week, Piper Jaffray lowered its sales and earnings estimates for Applied's fiscal 2011 and 2012 results. It's now calling for fiscal 2011 sales and earnings of $11 billion and $1.51 a share, respectively, down from $11.2 billion and $1.52 a share. In fiscal 2012, it sees sales of $10.4 billion -- down from $12.5 billion -- and earnings of $1.50 a share (vs. $1.80 a share).
Despite the downward revisions, Piper Jaffray still maintains an "overweight" rating on the stock and a 12-month price target of $18 a share.
Twelve of the 24 analysts tracking Applied Materials rate the stock either a "buy" or "strong buy."