Description

August Technology (AUGT) is a small-cap semiconductor equipment company that should receive a topping bid from industry heavyweight KLA-Tencor (KLAC) in the next few weeks. It is likely that shareholders will have an opportunity to receive $11.50 or more within the next two months with downside limited by AUGT’s current deal with Rudolph Technology (RTEC) currently valued at roughly $10/share.

The three-way battle for AUGT has lasted almost a year and has resulted thus far in an agreed stock and cash merger with RTEC, after canceling a prior inferior deal with Nanometrics (NANO). Over the past year, KLAC has consistently reiterated the strategic importance of acquiring AUGT and has offered $11.50/share in cash (less than 10% of KLAC’s over $2 billion cash balance). The current RTEC deal with RTEC’s stock below $13/share implies about $10/share blended value vs. the $10.50/share value at the time of original agreement (when RTEC traded near $14 in June).

KLAC has purchased over 4% of AUGT shares in the open market, has already cleared antitrust review for the deal and has refused to sign a confidentiality agreement with AUGT in order to maintain flexibility in taking an offer directly to shareholders. After refiling its deal proxy with RTEC in December, AUGT is nearing an effective date on the document in January which would set a merger vote date for February and finally start the clock ticking for KLAC to launch a formal superior offer. Given KLAC’s repeated interest and the relatively small deal size, KLAC should be able to present an offer directly to shareholders at a premium to the current trading price of AUGT shares in the near-term.

Business description
August Technology Corporation provides automated defect detection and product characterization systems for microelectronic device manufacturers worldwide. Its products include microscope-based imaging systems, automated wafer back-side inspection systems, automated wafer-edge inspection and metrology systems, automated wafer bump inspection and metrology systems, automated defect inspection systems, defect review and process analysis software, probe mark inspection systems, advanced microscope-based imaging system, fab-wide data management software, and cassette verification and metrology systems. The company sells its systems to various microelectronic device manufacturers worldwide within the markets of semiconductors, packaging applications, optoelectronics, micro electromechanical systems, data storage, flat panel display, printheads, data storage, disk drives, medical devices, and other similar devices. August Technology was founded by Jeff L. O’Dell in 1992 and is headquartered in Bloomington, Minnesota.

Key deal chronology
1/21 NANO deal announced
1/28 RTEC offers $10.50/share in stock/cash
2/9 KLAC offers $11.50/share all cash
4/4 RTEC signs confidentiality agreement with AUGT
4/5 KLAC announces 4.2% stake in AUGT
6/28 RTEC deal announced (NANO deal cancelled)
7/13 KLAC offer clears antitrust review
9/28 AUGT announces need to restate accounting (timing of some revenue recognized)
11/9 AUGT completes financial restatements
11/16 KLAC announces management promotions, reiterates interest in AUGT
12/9 RTEC affirms deal on previous terms, refiles proxy

Valuation
For reference on valuation, Piper Jaffray presents summary transaction multiples for a dozen related deals since 2001 in the deal proxy. The deal values AUGT below the median multiples on both a sales and forward earnings basis.

AUGT deal value vs. median multiple
EV/Revenue (LTM): 1.8x / 2.0x
EV/Revenue (NTM): 1.5x / 1.7x
P/E (LTM): 28.9x / 23.8x
P/E (NTM): 17.3x / 24.8x

Of course, KLAC can afford to pay much more than standard industry valuations due to the strategic importance and relatively small size of the deal compared to their market cap and cash balance. Nonetheless, KLAC has no reason to pay more than they feel they need to get a deal done. With RTEC’s offer around $10-10.50/share and KLAC’s prior offers at $11.50, KLAC could try presenting their $11.50 offer directly to shareholders. Given the amount of time and effort already expended on this deal over the past year and the relatively small size, KLAC is likely to offer $12/share or greater in order to differentiate their offer conclusively and increase certainty of closing.


Catalysts
*Deal proxy completion in January should lead to KLAC bid/tender soon thereafter.
*Deal roadshow in January should highlight positive aspects of RTEC deal, likely increasing the floor on the RTEC valuation.

Catalyst

*Deal proxy completion in January should lead to KLAC bid/tender soon thereafter.
*Deal roadshow in January should highlight positive aspects of RTEC deal, likely increasing the floor on the RTEC valuation.