KLA-Tencor buys Orbotech: Semiconductor space in the grip of consolidation wave

That the fate of Broadcom’s (AVGO) hostile bid to take over Qualcomm (QCOM) is almost sealed, the former is reportedly shifting focus to smaller entities in the sector for potential buyouts. The semiconductor industry that is currently on a consolidation spree is abuzz with reports of more firms taking the merger route to leverage their synergies.

And, some reports also suggest that Qualcomm’s struggle to stay independent is not over yet. The takeover bid was marked by the many twists and turns it took, before collapsing following the intervention of a government-appointed regulatory panel.

The latest proposal to buy the much sought-after chipmaker came from Paul Jacobs, a former executive and son of Qualcomm’s founder Irwin Jacobs. While Qualcomm’s board of directors is weighing the offer, it has decided not to have Jacobs in it anymore.

Before the ripples of the failed Broadcom-Qualcomm deal died down, semiconductor equipment manufacturer KLA-Tencor (KLAC) entered into an agreement to buy Israel-based Orbotech (ORBK), a provider of yield-enhancing solutions to the electronics industry, for $3.4 billion.

The board of directors of both the companies has approved the transaction, which is expected to conclude by year-end, making the whole process a hassle-free affair.

KLA-Tencor has entered into an agreement to acquire Israel-based Orbotech for $3.4 billion

The incorporation of Orbotech is anticipated to add immediately to KLA-Tencor’s revenues and earnings, while also ensuring cost synergies of about $50 million on an annualized basis within two years after the closure.

The amalgamation of the relatively lesser known firms in semiconductor technology is expected to help the combined entity to expand its revenue base, leveraging the broader portfolio, in the areas of the printed circuit board, flat panel display, packaging, and semiconductor manufacturing.

Pursuant to the buyout, KLA-Tencor will embark on a $2-billion share repurchase program spanning 12-18 months. KLA-Tencor is planning to fund the acquisition and share buyback through cash on hand and $1 billion in debt. KLA-Tencor shares are down around 5% today.