Why Applied Materials Cancelled Its Merger

Applied Materials and Tokyo Electron announced early Monday morning that they have agreed to terminate their merger. In accordance with the agreement, no termination fees will be payable by either party. The merger was originally announced in September 2013.

Basically, this decision came after the U.S. Department of Justice advised the parties that the coordinated remedy proposal submitted to all regulators would not be sufficient to replace the competition lost from the merger. Based on the Department of Justice’s position, Applied Materials and Tokyo Electron determined that there is no realistic prospect for the completion of the merger.

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Gary Dickerson, president and CEO of Applied Materials, commented on the termination:

We viewed the merger as an opportunity to accelerate our strategy and worked hard to make it happen. While we are disappointed that we are not able to pursue this path, our existing growth strategy is compelling. We have been relentlessly driving this strategy forward and we have made significant progress towards our goals. We are delivering results and gaining share in the semiconductor and display equipment markets, while making meaningful advances in areas that represent the biggest and best growth opportunities for us.

Merrill Lynch estimated a downside near $20 for the stock, which appears to be right in the wheelhouse by the way that shares are moving in response to the news. The analyst firm also believes that there is room for operational margins to expand and capital returns.

At the same time as the announcement of the merger termination, the company announced a $3 billion share repurchase program that will take place over the next three years.

So far on the year, Applied Materials stock has lost about 12%. It currently trades near a 16 multiple for its estimated 2015 fiscal year earnings.

Shares of Applied Materials were down 7.4% to $20.19 in early trading Monday. The 52-week trading range is $18.27 to $25.71 and the consensus analyst price target is $27.36.

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