Keith Flaum, 50, M&A partner in the Silicon Valley office of Weil, Gotshal & Manges.
Santa Clara, California–based Applied Materials, the world’s top supplier of chipmaking equipment used to produce electronics and flat panel displays.
Applied Materials has agreed to acquire Japanese rival Tokyo Electron in an all-stock deal that values the target at $9.3 billion and creates a combined company with a total market value of roughly $29 billion.
The two companies announced the deal—which they refer to as a “merger of equals”—on Tuesday. Their agreement calls for Tokyo Electron shareholders to exchange each of their shares in that company for 3.25 shares in the newly formed entity, which has yet to be named. Applied Materials shareholders will in turn receive one share of stock in the new company for each of their shares, giving them a 68 percent stake in the combined company. Tokyo Electron’s investors will own the remaining 32 percent.
The combined entity will be incorporated in The Netherlands, but will maintain dual headquarters in Santa Clara and Tokyo. Each of the legacy companies will designate five members for the new company’s board, with an additional representative to be mutually agreed upon. Applied Materials CEO Gary Dickerson, who said he plans to move with his family to Japan, will serve as the combined company’s CEO; Tokyo Electron CEO Tetsuro Higashi will become chairman. The deal is expected to close before the end of 2014, pending the approval of regulators in multiple countries and both companies’ shareholders.
THE BIG PICTURE
The deal would be one of the largest-ever foreign takeovers of a Japanese business, with the two companies combining to dominate a chipmaking-equipment sector in which Applied Materials currently ranks No. 1 and Tokyo Electron ranks No. 3 (Dutch rival ASML Holding is sandwiched between the two). The Wall Street Journal notes that demand for chip manufacturing equipment has dropped in recent years as clients look to cut their production costs—a factor that has led companies in the volatile semiconductor chip industry to consider consolidation in order to save money.
Still, the combination of the first- and third-largest companies in the industry is sure to attract plenty of regulatory scrutiny. Citing the overlapping products offered by Applied Materials and Tokyo Electron, CNBC’s resident squawker—and American Lawyer alumnus—Jim Cramer said this week that he is betting that the deal won’t receive regulatory approval in the U.S. The transaction will also face a slog in Japan, which has historically shunned outside takeovers of its companies—one reason why Applied Materials and Tokyo Electron are billing the deal as “a merger of equals” and splitting control of the new company’s board despite the final share split giving Applied Materials majority control.
If approved, the deal—which follows in the footsteps of this year’s Omnicom-Publicis merger as a model for cross-border tie-ups that result in dual headquarters combined with Dutch incorporation—could pave the way for an influx of foreign investors in Japan, according to Reuters. Dutch firm De Brauw Blackstone Westbroek was among the advisers on both the Omnicom deal and the Applied Materials transaction and corporate head Ton Schutte believes The Netherlands is an attractive location for foreign companies because it represents a “neutral” option with relatively lax regulations. “Governance in The Netherlands is flexible and recognizable, which makes non-Dutch companies feel comfortable,” Schutte said in a statement earlier this week.
Flaum was part of a large corporate group that joined Weil’s Silicon Valley office last year from now-defunct firm Dewey & LeBoeuf, and Applied Materials—which he has advised on many major transactions going back to the mid-1990s—was among the longtime clients he brought with him. In 2011 Flaum led a Dewey team representing the company in connection with its $4.9 billion acquisition of Varian Semiconductor Equipment Associates. Flaum also worked with Applied Materials while he was a partner at Cooley (which he left for Dewey in 2009), advising the company on various deals that included the 2006 purchase of Applied Films Corporation for $464 million.
Flaum has remained Applied Materials’ go-to counsel even as the company’s executive team underwent major changes during the past year, with Gary Dickerson taking over as CEO after holding that title at Varian when Applied Materials acquired it last year. Varian’s former chief financial officer, Robert Halliday, assumed that role at Applied Materials earlier this year.
Says Flaum: “It was pretty interesting, having negotiated against Gary Dickerson and Bob Halliday [the former CEO and CFO of Varian, respectively], then to flip them and have them be on the same side. And it’s much more fun being on the same side as them than the opposite side.”
An “unprecedented and one-of-a-kind transaction” is how Flaum describes having large public companies in the U.S. and Japan combine to form a new holding company in The Netherlands. “[If] you try to find out, ‘Which precedent should I use to think through some of these issues?’ there are a total of zero,” he says.
He points to July’s Omnicom-Publicis merger, which created a company worth $35.1 billion, as one of the few examples his team could draw on—except that many of the documents related to that deal have not yet been made public. Also, Flaum says, the Japanese legal system presents challenges that are distinct from the European regulatory process that Omnicom and Publicis face with their transaction.
“Reconciling three legal systems—the U.S., Japan, and The Netherlands—was quite wild,” Flaum says.
In order to ensure all of the relevant regulatory issues had been addressed heading into signing, Flaum—whose team already included Weil attorneys in New York, Silicon Valley, and Washington, D.C.—worked with colleagues at Japanese firm Mori Hamada & Matsumoto and De Brauw Blackstone Westbroek. Teaming up with a host of attorneys spread around the globe was necessary, Flaum says, to “make sure that we thought about all issues from all jurisdictional perspectives—whether they be securities law issues, whether they be tax-related issues, whether they be corporate governance-related issues—we had to be planning for all of that so that we knew exactly what we were getting into.”
After working with attorneys at multiple firms and in three different legal systems—and after briefing the U.S.-based Applied Materials board members on matters such as the nuances of Dutch corporate governance structures—Flaum says this deal stands out among the many transactions he has handled for this client: “It was definitely one of the more complicated deals [and also] probably one of the coolest deals I’ve done in my career.”