Rudolph Makes Its Own Bid for August

By Jeff Chappell -- Electronic News, 1/28/2005

Just a week after August Technology Corp. and Nanometrics Inc. announced plans to merge, rival metrology firm Rudolph Technologies Inc. said late last night that it was making its own bid for August.

Rudolph said that it has made a merger offer to August's board of directors; it is prepared to offer each August shareholder the value of $2.16 per share in cash and 0.4955 a share in Rudolph common stock (equivalent to $10.50 per share of August stock, based on the closing price of Rudolph stock on Thurs).

Last Friday on Jan. 21, August and Nanometrics announced their own plans to merge and form August Nanometrics Inc.

Rudolph's offer would include the option for each August shareholder receive all cash, stock, or a combination of cash and stock, subject to proration based on the total cash consideration of $40 million and shares available in the merger, according to Rudolph. This would place the total purchase price in the neighborhood of $190 million.

In contrast, the proposed Nanometrics/August merger qualifies as reorganization under U.S. Internal Revenue Service codes. Nanometrics would reincorporate in Delaware, with each share of its common stock exchanged for one share of Nanometrics Delaware, a subsidiary of Nanometrics formed in connection with the reincorporation, and each share of August Technology common stock would then be exchanged for 0.6401 of a share of Nanometrics Delaware.

Rudolph management said in a conference call this morning with analysts that this is one reason their offer is more compelling; unlike the Nanometrics merger, Rudolph's proposal essentially provides a premium to August shareholders, said Paul McLaughlin, Rudolph's CEO.

"The bottom line is, I think this is compelling for them," McLaughlin said. " Instead of a negative premium, this is a positive premium." In terms of August's current stock trading value, which has been trading near all-time lows, and Nanometrics stock, the merger essentially values August at 10 percent less than its value as an individual company, according to financial analysts.

But August Technology management suggested during a conference call with analysts last week that the merger was one of equals, and that the value lies in long term opportunities, not current stock prices.

"This was not a spot decision on yesterday's relationship between the stocks. The whole sector here has been volatile," said Stan Piekos, August's CFO. "Besides, I mentioned earlier, this has been a process that has gone back some five months now.

"So we look at this as a merger of equals and the transaction was structured that way," Piekos said. "And we finalized agreements, and where the stocks ended up at the end of the day had little relevance, no relevance, quite frankly in what we're putting together here for the future.

"So in terms of the specifics on the financial considerations of both companies, we're well advised," he continued. "And those opinions and the metrics considered, and putting all of that together will be apparent, again, with the proxy filings and the opinion in those proxy filings in the next couple of weeks."

Rudolph said it advised the August board that Rudolph is prepared to meet with August as early as today to move on the close of the transaction, and that it was prepared to close as early as Q2.

Rudolph also said that it would be posting material on its Web site later today in support of its merger offer, contending that it would support of its contention that it's merger offer is the better one.

Merger Battle a Symptom of Larger Trends

The fact that August, a small metrology company, is at the center of a merger battle between two other relatively small players is symptomatic of several larger trends within the semiconductor market. Chipmakers – the direct customers of process equipment vendors – are consolidating, and as such, it is driving increased competition and consolidation among their vendors.

Furthermore, it is becoming increasingly necessary not to just have superior products, but a global infrastructure for sales and support. Essentially, building what is often referred to as critical mass for smaller players like August, Nano and Rudolph is going to be a matter of survival when it comes to competing with giants like KLA-Tencor and Applied Materials, even when the companies may have a solid lock on their respective market niches and technologies.

Factor in the fact that wafer yields, and consequently yield management and the utilization of fab data to accomplish better yields, is becoming of utmost importance. As the 300mm era converges with the orders of magnitude increases in complexity in process technology and materials integration, metrology, process control and similar technologies are going to be critical.

Thus a company like August finds itself in the middle of a tug-of-war between Rudolph and Nanometrics. Rudolph is most known for front-end, thin film inspection, while August has concentrated on back-end macro defect inspection, which is becoming a critical area as more advanced packaging technologies come to bear, such as wafer level packaging.

Nanometrics, on the other hand, has concentrated on critical dimension metrology over the course of its history, and in recent years has become heavily involved in the burgeoning market for integrated metrology tools, as opposed to stand-alone tools.

When asked for comment this morning, a third party spokesman for Nanometrics relayed a comment from the company that it couldn't discuss the Rudolph bid, citing a confidentiality agreement. A call to August Technology this morning was not immediately returned at the time this story was posted.