Case study 1 Lam research buys Novellus systems to consolidate industry. Key Points: · Industry consolidation is a common response to sharply escalating costs, waning demand, and increasing demands of new technologies. · Customer consolidation often drives consolidation among suppliers Highly complex electronic devices such as smartphones and digital cameras have become ubiquitous I our everyday lives. These devices are powered by sets of instructions encoded on wafers of silicon called semiconductor chips (semiconductors). Consumer and business demands for increasingly sophisticated functionally for smartphones and cloud computing technologies require the ongoing improvement of both the speed and the capability of semiconductors. This in turn places huge demands on the makers of equipment used in the chip-manufacturing process. To stay competitive, makers of equipment used to manufacture semiconductor chips were compelled to increase R&D spending sharply. Chip manufacturers resisted paying higher prices for equipment because their customers, such as PC and cellphone handset makers, were facing declining selling prices for their products. Chip equipment manufacturers were unable to recover the higher R&D spending through increasing selling prices. The resulting erosion in profitability due to increasing R&D spending was compounded by the onset of the 2008-2009 global recession. The industry responded with increased consolidation in an attempt to cut costs, firm product pricing, and gaining access to new technologies. Industry consolidation began among chip manufacturers and later spurred suppliers to combine. In February 2011, chipmaker Texas Instruments bought competitor National Semiconductor for $6.5 billion. Three months later, Applied Materials, the largest semiconductor chip equipment manufacturer, bought Varian. Semiconductor Equipment Associates for $4.9 billion to gain access to new technology. On December 21, 2011, Lam Research Corporation (Lam) agreed ti buy rival Novellus Systems Inc. (Novellus) for $3.3 billion. Lam anticipates annual cost savings of $100 million by the end of 2013 due to the elimination of overlapping overheads. Under the terms of the deal, Lam agreed to acquire Novellus in share exchange in which Novellus shareholders would receive 1.125 shares of Lam common stock for each Novellus share. The deal represented a 28% premium over the closing price of Novellus’s shares on the day prior to the deal’s public announcement. At closing, Lam shareholders owned about 51% of the combined firms, with Novellus shareholders controlling the rest. In comparison to earlier industry buyouts, the purchase seemed like a good deal for Lam’s shareholders. At 2.3 times Novellus’s annual revenue, the purchase price was almost one-half the 4.5 multiple paid by industry leader Applied Materials for Variant in May 2011. The purchase premium paid by Lam was one-half o that paid for comparable transactions between 2006 and 2 ...

1. Case study 1
Lam research buys Novellus systems to consolidate industry.
Key Points:
· Industry consolidation is a common response to sharply
escalating costs, waning demand, and increasing demands of
new technologies.
· Customer consolidation often drives consolidation among
suppliers
Highly complex electronic devices such as smartphones and
digital cameras have become ubiquitous I our everyday lives.
These devices are powered by sets of instructions encoded on
wafers of silicon called semiconductor chips (semiconductors).
Consumer and business demands for increasingly sophisticated
functionally for smartphones and cloud computing technologies
require the ongoing improvement of both the speed and the
capability of semiconductors. This in turn places huge demands
on the makers of equipment used in the chip-manufacturing
process.
To stay competitive, makers of equipment used to manufacture
semiconductor chips were compelled to increase R&D spending
sharply. Chip manufacturers resisted paying higher prices for
equipment because their customers, such as PC and cellphone
handset makers, were facing declining selling prices for their
products. Chip equipment manufacturers were unable to recover
the higher R&D spending through increasing selling prices. The
resulting erosion in profitability due to increasing R&D
spending was compounded by the onset of the 2008-2009 global
recession.
The industry responded with increased consolidation in an
attempt to cut costs, firm product pricing, and gaining access to

2. new technologies. Industry consolidation began among chip
manufacturers and later spurred suppliers to combine. In
February 2011, chipmaker Texas Instruments bought competitor
National Semiconductor for $6.5 billion. Three months later,
Applied Materials, the largest semiconductor chip equipment
manufacturer, bought Varian.
Semiconductor Equipment Associates for $4.9 billion to gain
access to new technology. On December 21, 2011, Lam
Research Corporation (Lam) agreed ti buy rival Novellus
Systems Inc. (Novellus) for $3.3 billion. Lam anticipates annual
cost savings of $100 million by the end of 2013 due to the
elimination of overlapping overheads.
Under the terms of the deal, Lam agreed to acquire Novellus in
share exchange in which Novellus shareholders would receive
1.125 shares of Lam common stock for each Novellus share.
The deal represented a 28% premium over the closing price of
Novellus’s shares on the day prior to the deal’s public
announcement. At closing, Lam shareholders owned about 51%
of the combined firms, with Novellus shareholders controlling
the rest.
In comparison to earlier industry buyouts, the purchase seemed
like a good deal for Lam’s shareholders. At 2.3 times
Novellus’s annual revenue, the purchase price was almost one-
half the 4.5 multiple paid by industry leader Applied Materials
for Variant in May 2011. The purchase premium paid by Lam
was one-half o that paid for comparable transactions between
2006 and 2010. Yet Lam shares closed down 4%, and Novellus’
shares closed up 28% on the announcement date.
Lam and Novellus produce equipment that works at different
stages of the semiconductor-manufacturing process, making
their products complementary. After the merger, Lam’s product
line would be considerably broader, covering more of the

3. semiconductor-manufacturing process. Semiconductor-chip
manufacturers are inclined to buy equipment from the same
supplier due to the likelihood that the equipment will be
compatible. Lam is also seeking access to cutting-edge
technology and improved efficiency. Technology exchange
between the two firms is expected to help the combined firms to
develop the equipment necessary to support the next generation
of advanced semiconductors.
Customers of the two firms include such chip makers as Intel
and Samsung. By selling complementary products, the firms
have significant cross-selling opportunities as equipment
suppliers to all 10 chip makers globally. Together, Lam and
Novellus are able to gain revenue faster than they could
individually by packaging their equipment and by developing
their technologies in combination to ensure they work together.
Lam has greater penetration with Samsung and Novellus with
Intel.
Lam also stated on the transaction announcement date that a 1.6
billion share repurchase program would be implement within
12 months following closing. The buyback allows shareholders
to sell some of their shares for cash such that, following
completion of the buyback, the deal could resemble a half-
stock, half-cash deal, depending on how many shareholders
tender their shares during the buyback program. The share
repurchase will be funded out of the firms’ combined cash
balances and cash flow. Structuring the deal as an all-stock
purchase at closing allows Novellus shareholders to have a tax-
free deal.
Discussion Question
1. Why did Lam’s shares close down 4% on the news that Lam
would buy Novellus? Why did Novellus shares close up 28%?
2. Speculate why Lam used stock rather than some other form of

4. payment
3. Describe how market pressure on semiconductor
manufacturers impact chip-equipment makers and how this
merger will help Lam and Novellus better serve their customer
4. How do the high fixed costs in the cyclical chip-equipment-
manufacturing industry encourage consolidation?
5. Is this deal a merger or a consolidation from a legal
standpoint?
6. Is this deal a horizontal or a vertical transaction? Why is this
distinction significant?
7. What are the motives for the deal? Discuss the logic
underlying each motive you identify.
8. How are Lam and Novellus similar and how are they
different? In what way will their similarities and differences
help or hurt the long-term success of the merger?
9. Speculate as to why Lam announced a $1.6 billion share
repurchase program at the same time it announced the deal.
10. Do you believe this transaction would help or hurt
competition among semiconductor-equipment manufacturers?
Case study 2.
The Importance of Timing: The Express Scripts and Medco
Merger.
Key points.
· While important, industry concentration is only one of many
factors antitrust regulators use in investigating proposed M&As.
· The timing of the proposed Express Scripts-Medco merger
could have been the determining factor in its receiving
regulatory approval.
Following their rejection of two of the largest M&As announced
in 2011 over concern about increased industry concentration,
U.S. antitrust regulators approved on April 2, 2012, the
proposed takeover of pharmacy benefits manager Medco Health

5. solutions Inc. (Medco) by Express Scripts Inc., despite similar
misgivings by critics. Pharmacy benefit managers (PBMs) are
third-party administrators of prescription drug programs
responsible for processing and paying prescription drug claims.
More than 210 million Americans receive drug benefits through
PBMs. Their customers include participants in plans offered by
Fortune 500 employers, Medicare Part D participants, and the
Federal Employees Health Benefits program.
The $29.1 billion Express Scripts-Medco merger created
the nation’s largest pharmacy benefits manager administering
drug coverage for employers and insurers through its mail order
operations, which could exert substantial influence on both how
and where patients buy their prescription drugs. The combined
firms will be called Express Scripts Holding Company and will
have $91 billion in annual revenue and $2.5 billion in after-tax
profits. Including debt, the deal is valued at $34.3 billion.
Together the two firms controlled 34% of the prescription drug
market in the first quarter of 2012, processing more than 1.4
billion prescription; CVS-Caremark is the next largest, with
17% market share. The combined firms will also represent the
nation’s third-largest pharmacy operator, trailing only CVS
Caremark and Walgreen Co.
The Federal Trade Commission’s approval followed an
intensive eight-month investigation and did not include any of
the customary structural or behavioral remedies that accompany
approval of mergers resulting in substantial increases in
industry concentration. FTC antitrust regulators voting for
approval argued that the Express Scripts-Medco deal did not
present significant anticompetitive concerns, since the PBM
market is more susceptible to new entrants and current
competitors provide customers significant alternatives.
Furthermore, the FTC concluded that Express Scripts and
Medco did not represent particularly close competitors and that
the merged firms would not result in monopolistic pricing
power. In addition, approval may have reflected the belief that
the merged firms could help reduce escalating U.S. medical

6. costs because of their greater leverage in negotiating drug
prices with manufacturers and their ability to cut operating
expenses by eliminating overlapping mail-handling operations.
The FTC investigation also found that most of the large private
health insurance plans offer PBM services, as do other private
operators. Big private employers are the major customers of
PBMs and have proven to be willing to switch PBMs if another
has a better offer. For example, Medco lost one third of its
business during 2011, primarily to CVS Caremark.
In addition, to CVS Caremark Corp, PBM competitors
include UnitedHealth, which has emerged as a recent entrant
into the business. Having been one of Medco’s largest
customers, UnitedHealth did not renew its contract, which
expired in 2012, with Medco, which covered more than 20
million of its pharmacy benefit customers. Other competitors
include Humana, Aetha, and Cigna, all of which have their own
PB< services competing for managing drug benefits covered
under Medicare Part D. With the loss of UnitedHealth’s
business, Express
Script-Medco’s share dropped from 34% in early 2012 t 29% at
the end of that year.
Critics of the proposed merger argued that similar PBM
firms often do not have the bargaining power and data-handling
capabilities of their larger competitors. Moreover, benefits
managers can steer health plan participants to their own
pharmacy-fulfillment services, and employers have little choice
but to agree, due to their limited leverage. Opponents argue that
the combination will reduce competition, ultimately raising
drug prices. As the combined firms push for greater use of mail-
ordering prescriptions instead of local pharmacies, smaller
pharmacies could be driven out of business, for mail-order
delivery is far cheaper for both PBMs and patients than
dispensing drugs at a store.
Discussion Questions.

7. 1. Why do you believe that U.S. antitrust regulators approved
the merger despite the large increase in industry concentration
2. Did the timing of the proposed merger between Express
Scripts and Medco help or hurt the firms in obtaining regulatory
approval?
3. Speculate as to how the Express Scripts-Medco merger might
influence the decisions of their competitors to merge?