Tuesday, March 22, 2011

WaferNEWS Watch: Test tango changes tempo, VRGY chooses ATE over LTXC

The apparent lack of movement in the battle for Verigy's (VRGY) hand in marriage appears to have a victor: the company has "unanimously determined" that Advantest's (ATE) bid of $15/share in cash -- roughly a $900M valuation, note the Wall Street Journal and Nikkei daily -- is "a superior offer" than that of original suitor LTC Credence (LTXC). VRGY is still playing it coy, though, leaving the door ajar until March 25 in case LTXC counters with a sweetened offer "that would cause the Advantest proposal to cease to constitute a 'Superior Offer.'" (At this writing, 3/22/2011 at 10:45am: VRGY stock is up about 11% to $14.14; ATE is up a 6.5% to $17.68; LTXC is down about 4.3% to $8.09.)

But don't hold your breath for a LTXC rebuttal, thinks Satya Kumar from Credit Suisse. Among its options, the company most likely will choose to terminate the deal (and pocket a $15M breakup fee) and let VRGY+ATE sort out any DoJ antitrust problems, while it refocuses on its own business, he writes. The other options are less attractive: come back with a better offer, or take its case straight to VRGY shareholders, who probably won't be too receptive since the original terms (a 0.96:1 stock swap) are now dilutive at current share prices, and VRGY's board is publicly backing the ATE offer. In a terse PR, LTXC said it would explore its options, but with "the express purpose of preserving shareholder value."

So what's next for a VRGY+ATE combination? ATE already sent a note to the DoJ in January, with a second notice received by both companies in mid-February, from which point they had 60 days to respond, explains Kumar. If LTXC does back out, VRGY and ATE can go ahead and respond to the DoJ (until/if not, VRGY is on its own without ATE's help), after which the DoJ has 30 days to approve, request amendments, or enter litigation. "VRGY and Advantest have very little overlap in the markets that they operate in, leading us to believe deal has a high chance of receiving DoJ clearance eventually," he writes.

Ultimately, he notes, the winner in all of this is: Teradyne, the overall market leader. "We continue to view a possible consolidation of the test equipment space as a significant longer term positive for TER," he writes. In an earlier analysis, CJ Muse from Barclays pointed out that the test market
has condensed within a decade from a dozen jostling competitors to now just three players with ≥95% market share (two with ≥80%), which makes everyone behave more rationally, which translates to better ASPs and margins.

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