broad outlines of the deal
Yesterday INTC and ASML announced an agreement under which INTC will pay ASML a bit more than $4 billion over the next five years. The money, which will come entirely from balances INTC has on deposit outside the US, comes in two piles:
–$3 billion+ will go to acquire a 15% ownership interest in ASML, and
–$1 billion+ will be a contribution to ASML’s R&D efforts. Part of this will be purely a research expense; part will be a prepayment on the future delivery of the tools that research will enable.
ASML’s goal is to raise a total of $6.7 billion through such deals. It’s now in talks with its other two big customers, TSMC and Samsung. INTC’s commitment brings ASML 60% of the way to its goal.
I’m going to write about this deal in three posts. Today, I’ll look at it from ASML’s perspective and tomorrow from INTC’s. On Friday, I’ll write about the deal itself in detail, including some of its more eccentric aspects.
from ASML’s perspective
who ASML is
ASML is a Netherlands-based maker of semiconductor production equipment. Its specialty is lithography machines, devices that place the semiconductor design onto the silicon that will ultimately become the semiconductor chip.
ASML has two traditional rivals, Canon and Nikon.
increasing capital intensity
The increasingly capital-intensive nature of semiconductor manufacturing has several implications for ASML:
–R&D budgets are getting bigger. ASML will spend at least several billion dollars developing the next generation of machines.
–the machines themselves are getting more expensive. Top-of-the-line lithography machines can cost $70 million apiece today. Next generation ones will probably cost $100 million+.
–as a result of the big capital requirements, ASML has only three really important customers. They are: INTC, TSMC and Samsung.
today’s inflection point
INTC is currently using lithography machines that can “write” the lines of a chip design onto silicon as close to one another as 22 nanometers. TSMC is at 28nm. INTC is planning to be at 14nm next year. As a general rule, the smaller the line spacing the faster the chip, the less power it uses and the less heat it throws off. So smaller is (very) good.
The semiconductor equipment industry is starting to work on next-generation lithography machines, using an Extreme Ultra Violet (EUV) process that will allow lines to be drawn within 10nm or less of one another. The industry expectation is that they will be available in about six or seven years.
At the same time, semiconductor equipment makers are also starting work on the less expensive task of increasing the maximum size of the silicon disks they can handle from the current 12″ to 18″. That has the potential of doubling the number of chips that one disk will yield, and dropping unit costs by 30%-40%.
Q: bet the farm or not? A: not.
ASML is in a boom or bust business. It’s currently in boom. At the end of 2011, the company had net cash of over $3 billion. The current stock price is 4x its level during the bust days of late 2008, when ASML was losing money.
The company thinks that, in addition to the cash flow it expects to generate, it will need to spend close to another $2 billion to develop EUV and 18″ products. Should it bet the farm and take on the expense alone–possibly having to do an equity offering to raise funds? …and without any assurance that customers would buy the new machines? Or should it try to get the three big semiconductor producers to help fund development and agree in advance to purchase ASML’s next-generation output, rather than that of a Japanese rival?
It has chosen the more conservative course. INTC is the first to sign up.
cashing out existing holders
Raising the needed R&D money from customers rather than raising it from existing holders through a rights issue is one thing. But ASML is going a step farther. It’s proposing to use a “synthetic buyback” to distribute to existing shareholders the entire $5 billion it gets from issuing new stock, while reducing their equity interest from 100% of the company to 75%. It’s kind of like a rights issue in reverse.
Presumably, major Netherlands holders have already given their okay (telling you something about what they think of today’s ASML stock quote).
More on this on Friday.