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Sumitomo makes hostile takeover bid for Axcelis

Posted: 13 Feb 2008 ?? ?Print Version ?Bookmark and Share

Keywords:hostile takeover bid? Axcelis shares? Sumitomo letter?

Japan's Sumitomo Heavy Industries Ltd and private-equity firm TPG Group have launched an unsolicited and hostile bid to acquire ion-implanter specialist Axcelis Technologies Inc. for approximately $544 million.

Sumitomo launched the bid, as ''Axcelis' market share and financial performance have declined dramatically,'' according to the Japanese company. Sumitomo also released to the public a letter to Axcelis' board.

The Axcelis board has declined to engage in meaningful discussions regarding a possible business combination. Unsolicited takeover bids are rare in the chip-equipment industry, especially involving a Japanese firm.

For years, Axcelis and Sumitomo have been engaged in a joint fab-tool venture in Japan, dubbed SEN Corp. The venture sells ion implanters and other gear in Japan.

Now, it appears that the Japanese company wants to buy the U.S. fab-tool maker. The other party involved is TPG, formerly Texas Pacific Group.

The move could impact the ion implanter business. Axcelis and Varian are the two major players in the sector, but Axcelis is losing share to its rival. There are a few niche players in the arena. Applied Materials Inc. recently exited the business.

Strange events
The events leading to the proposed takeover are somewhat strange. Axcelis confirmed that it has received a series of unsolicited letters from Sumitomo dated Feb. 4, 2008 and Feb. 11, 2008, in which Sumitomo makes a contingent proposal to acquire Axcelis at $5.20 per share.

Sumitomo, according to Axcelis, uses the latter's currently depressed stock price as a rationale for its timing. ''The proposed price is almost 10 percent less than the average closing price of Axcelis over the last 52 weeks,'' Axcelis said.

On Feb. 7, Axcelis responded to Sumitomo's letter, saying it ''would be discussing their proposal with its advisors and would respond once the discussions were complete. Instead, the Japanese company chose to not wait for Axcelis to respond and made public its letter of February 11, 2008.''

Axcelis stated today that shareholders do not need to take any action now. The board ''is considering the unsolicited overture,'' according to Axcelis.

Sumitomo has a different viewpoint. ''Over the last 18 months we have repeatedly made good faith efforts to engage Axcelis' board in meaningful discussions about a combination that would deliver significant immediate value to stockholders and create a company better able to respond to marketplace challenges and compete successfully over the long-term,'' said Yoshio Hinoh, chairman of SHI, in a statement.

"Axcelis' board has continually rebuffed our interest saying the timing was not right for them, and we have been extremely patient. However, during this time Axcelis' market share and financial performance have declined dramatically. We believe that time is of the essence for Axcelis, and that the company's stockholders, customers and employees deserve to be made aware of our compelling proposal," he said.

Axcelis recently reported Q4 revenues of $89.6 million, compared to $107.6 million for Q3 2007. Net loss for Q4 was $10.6 million, or $0.10 per share, of which $0.02 was attributable to restructuring charges.

This compares to a net loss for Q3 2007 of $8.2 million, or $0.08 per share. In the corresponding quarter for the previous year, the company reported revenues of $123.3 million, and net income of $15.6 million, or $0.15 per share.

For the full year 2007, the company reported revenues of $404.8 million compared with $461.7 million in 2006. Net loss for the year was $11.4 million, or $0.11 per share. In 2006, the company reported net income of $40.8 million, or $0.40 per share.

Axcelis' financial outlook for Q1 2008 includes revenues in the range of $80 million to $95 million. The company also forecasts a Q1 loss per share in the range of $0.04 to $0.08 per share. Axcelis assumes no responsibility to update guidance. Axcelis will only confirm or update guidance via a press release.

Here's a text of a letter that was sent to Axcelis' board:

February 11, 2008
Members of the Board of Directors
Axcelis Technologies, Inc.
108 Cherry Hill Drive
Beverly, MA 01915-1053

Dear Sirs & Madam:

We are disappointed by your lack of positive response to our February 4, 2008 proposal to acquire Axcelis for $5.20 per share in cash -- a proposal that represents a 26.5% premium to Axcelis' closing stock price on February 1st and a 28.7% premium to the closing stock price on February 8th. Over the last 18 months, you have repeatedly rebuffed our good faith efforts to engage you in meaningful discussions about a possible combination that would deliver significant immediate value to your stockholders and create a company that is better able to meet customer needs, respond to marketplace challenges and compete successfully over the long-term.

We have been persistent in expressing our interest, but you have continually responded "now is not the right time." Throughout this period, while you have focused on your stand alone strategy, Axcelis' market share and financial performance have declined dramatically. Over the last eight quarters, Axcelis' reported revenue has declined about 27% from its peak and earnings per share have declined substantially to a negative position during the most recent two quarters. In addition, Axcelis has missed consensus estimates in five of the eight quarters.

We also note that Axcelis' unrestricted cash has fallen 59% to approximately $84 million while outstanding debt is $80 million, which raises significant questions about Axcelis' ability to maintain the necessary pace of technological innovation against competitors with far greater resources. As a consequence, Axcelis' stock price has declined approximately 22% since July 2006, when we first expressed interest in Axcelis, and is significantly underperforming its peers.

You have justified your resistance over the past 18 months by suggesting that new product sales would soon begin to drive growth and improve financial performance. Instead, research analysts' views have indicated that Axcelis' market share has further declined. According to the Gartner Semiconductor Equipment Database for 2006, Axcelis' share of the total ion implantation equipment market, excluding our joint venture SEN Corporation, has fallen from approximately 36% in 1997 to less than 15% in 2006, and Axcelis' share of the high current market has fallen from approximately 34% in 1997 to less than 9% in 2006.

According to published reports, analysts expect this downward trend in market share to continue, and as Axcelis recently stated, "market conditions are expected to continue to be weak in 2008". Axcelis is confronting an increasingly challenging market as its customers become larger and more sophisticated, its competitors become more vigorous and take market share, and the pace of new technology development quickens. Axcelis' ability to succeed as an independent company in the face of such a challenging market is in doubt.

We believe a combination of Axcelis, SHI and SEN would more effectively harness our collective resources, shared technology and global presence to compete more effectively worldwide over the long-term. As you know, SHI is an integrated machine manufacturer with leading technology and great financial resources. SEN has the largest market share of any ion implantation equipment company in Japan and has introduced to the market many innovative products. Together, we will be better able to meet our global customers' evolving wafer processing needs with a full suite of the most advanced ion implantation equipment and once again become the market leader. We believe this is a far better alternative for all parties, especially Axcelis' stockholders, than Axcelis continuing as a stand alone business suffering a continual decline in market share.

We anticipate that a combined entity would operate as an autonomous unit within SHI, combining the best of our mutual technologies and talent. We at SHI have always had the greatest respect for Axcelis and its employees and believe they would benefit from enhanced career opportunities that would come from being part of a stronger organization that is better able to invest and compete in the future.

Upon completion of the acquisition, the combined entity would also benefit from access to TPG, a leading global private investment firm, which is our minority partner and financing source in this transaction.

Our proposal, which values Axcelis' equity at approximately $544 million, is based on publicly available information. We would welcome the opportunity to review non-public information on Axcelis, and we are prepared to consider any enhanced value that may be demonstrated by such information. Our proposal is not contingent on financing, and we would expect to promptly secure regulatory approvals. Our proposal is subject to execution of definitive agreements on mutually acceptable terms and to confirmatory due diligence. As we have noted to you in the past, we are prepared to commence that due diligence review immediately and concurrently to negotiate a definitive agreement, and we have retained advisors to assist us in this regard.

Given the state of Axcelis' business, the challenging competitive landscape, and what we believe is an extremely compelling offer, we cannot understand your unwillingness to engage in meaningful discussions regarding a transaction. We believe that time is of the essence for Axcelis, and that your stockholders, customers and employees deserve to be made aware of our proposal. We remain ready to commence discussions immediately regarding a mutually agreeable transaction.

Sincerely,
Sumitomo Heavy Industries, Ltd.
Yoshio Hinoh
Chairman of the Board

- Mark LaPedus
EE Times




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