Applied Materials acquires Japanese competitor

Applied Materials agreed on Tuesday to merge with Tokyo Electron , a deal that’ll create a giant producer of semiconductor and flat-panel manufacturing equipment.

The market for tools to manufacture chips is subject to the boom and bust of the technology sector. Demand for products is slowing as PC sales slide and most companies are pinning their hopes for sales on the still-expanding market for smartphones. The merger is part of a wave of consolidation in the industry.

The all-stock deal values Tokyo Electron at $9.4 billion, a modest premium on its share price. Under the terms of the deal, Tokyo Electron shareholders will receive 3.25 shares of the new company for every Tokyo Electron share currently held. Shareholders of Applied Materials will own 68% of the new company.

The merge between two groups groups – which will take on a new name – plans to maintain a dual listing on the Nasdaq and Tokyo Stock Exchange, with dual headquarters in California and Tokyo, but will shift its incorporation to the Netherlands.

This change of legal domicile will enable the company to route its international profits through lower-tax countries, according to a person familiar with the deal, reducing its planned tax rate to 17% from a current target of 22%.

The new company will enter a semiconductor market in which manufacturers are increasing pinning their hopes on the still increasing demand from smartphones and tablets. Overall, the market is shrinking, and as a result, the manufacturers look at mobile devices as the best option to exploit. “It’s really all about mobile,” Michael Splinter, the former CEO now executive chairman, told analysts in July.

Combining Tokyo Electron and Applied Materials would give them control of as much as a quarter of the entire market. Other top Applied Materials rivals include Lam Research Corp., KLA-Tencor, ASM International and Veeco Instruments.

Applied and Tokyo Electron are the “best of breed,” said David Rubenstein, senior analyst at Advanced Research Japan.

“They have the highest profit margins, they have the best balance sheets, they make money through thick and thin,” he told Reuters news agency. “So, they are not desperate, but they are hungry for earnings growth, and this is one way they can do it.” he said.

The Money CNN current consensus among 20 polled investment analysts is to buy stock in Applied Materials Inc. This rating has held steady since September, when it was unchanged from a “buy” rating. Its important to be noticed that 10 analysts have voted a “buy” rating while 8 rated it as a “hold”.

Shares of the semi-conductor producer jumped by 9% after the news of the merge while have been on more than 50% run on a year-to-date basis.