Applied Materials scraps Tokyo Electron takeover due to antitrust concerns

CA: Companies In Silicon Valley
A logo sign outside the headquarters of Applied Materials, Inc., in Santa Clara, California on December 7, 2014. Photo Credit: Kristoffer Tripplaar/ Sipa USA *** Please Use Credit from Credit Field ***
Photograph by Kris Tripplaar — Sipa USA/AP

U.S. firm Applied Materials (AMAT) on Monday scrapped its $10 billion planned takeover of chip-making gear rival Tokyo Electron after the deal, a rare foreign bid for a Japanese firm, ran afoul of U.S. anti-trust regulators.

The all-share purchase would have combined two of the world’s largest makers of the equipment that makes semiconductor chips into a firm with a market value over $38.5 billion.

Tokyo Electron said both companies gave up on the deal after more than 18 months of talks after it became clear that differences with the U.S. Justice Department “will not be able to be bridged.”

The reasons for the regulator’s decision were not immediately clear, but California-based Applied Materials, in a joint statement, said the U.S. authorities had deemed insufficient a proposal to address their antitrust concerns.

“We must take with humility the result that we could not convince the regulators,” Tokyo Electron Chief Executive Tetsuro Higashi told reporters. “The termination of the merger is a very regrettable outcome, but it does no good to mourn.”

Applied Materials, Tokyo Electron and ASML Holding NV are the biggest firms in an industry where the rising cost of developing high-tech chips and slowing semiconductor demand are forcing alliances and acquisitions.

The pan-Pacific deal, announced in September 2013, would have been a rarity because the combined entity would have been listed in New York and Tokyo but incorporated in the Netherlands, the home of ASML.

Analysts had initially expected the takeover, aimed at spurring profit growth in both companies, to stand up to regulatory scrutiny.

The unravelling of the deal is worse for Tokyo Electron, said a Tokyo-based mergers and acquisitions lawyer, as takeover targets often lose management focus, and customers, during the negotiation period. CEO Higashi said Tokyo Electron would be “flexible in considering alliances with others in the future.”
[fortune-brightcove videoid=4194776029001]

To appease shareholders, both companies announced share buybacks. Applied Materials said it would buy up to $3 billion worth of shares over three years and Tokyo Electron said it plans to buy as much as 120 billion yen ($1 billion) worth of shares, or 8.59 percent of its outstanding stock.

No termination fee would be payable by either party, Applied Materials said.

Most U.S. chipmakers have sold off or mothballed capacity and outsourced manufacturing to Asian foundries such as Taiwan Semiconductor Manufacturing Co, further eroding Applied Material’s customer base.

($1 = 119.1600 yen)

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.