Veeco Snacks on Applied Epi

Veeco Instruments Inc. (Nasdaq: VECO), a supplier of tools for making components used in optical networking, data storage, and semiconductor research, announced this morning that it plans to buy Applied Epi Inc., a privately held supplier of specialty gear for making compound semiconductors (see Veeco, Epi to Merge).

The move is signficant because it signals strong market interest in materials that will increase the speed and capacity of optical networks -- and perhaps improve the integration of optical and silicon-based components. It's also a coup for the two component firms, which remain relatively unknown to mainstream industry observers, but are maintaining strength despite the telecom downturn.

"I think this is a great acquisition for us technologically and in terms of revenue and profitability," says Veeco CEO Edward H. Braun. "And it's going to be accretive to Veeco in the first quarter of our merger."

Veeco has offered 4 million shares of its common stock (approximately $104 million, according to the current share price), plus $30 million in cash to buy Applied Epi. Veeco hopes to close the deal later this month.

Located in Woodbury, N.Y., with offices in Europe and the Asia-Pacific region, Veeco employs about 1,500 people. It plans to retain all of the roughly 135 employees of Applied Epi at their location in St. Paul, Minn.

Veeco specializes in providing equipment for the making of optoelectronic components. Its products include ion beam deposition equipment, atomic force microscopes, special testers, and other gear needed to put together two or more materials in a compound semiconductor.

Applied Epi makes components and systems used in molecular beam epitaxy (MBE), the process of growing films on top of underlying materials to create compound semiconductors. It is one of a tiny number of companies worldwide, including Thermo VG Semicon, that specialize in MBE.

Veeco plans to use Applied Epi's techniques to bolster its own business and to create new products combining both companies' technologies by the end of next year.

According to Veeco, Applied Epi was one of the companies responsible for the recent materials breakthrough touted by Motorola Inc. (NYSE: MOT) (see Motorola Breakthrough Makes Waves ). Applied Epi supplies the technology for Motorola partner IQE PLC (Easdaq: IQEP; London: IQE) to create the wafers used in the Motorola research.

Veeco reported pro forma diluted earnings per share of $0.42 on sales of $113.5 million for its most recent quarter (see Veeco Posts Q2 Results). It forecasts total revenues to be $450 million this year, of which $140 million came from optical telecommunications component and equipment suppliers.

Veeco says the addition of Applied Epi's revenues will add roughly $20 million to this segment, increasing Veeco's presence among optical networking and wireless equipment suppliers. Braun projects that contribution to grow to $80 million as companies start to see the increased benefits of using compound semiconductors in optical components.

Braun says the use of compound semiconductors will reduce the cost and complexity of optoelectronics and radio frequency devices by a factor of ten, while allowing those devices to run up to 35 times faster than they do today. He says one example of how this will benefit optical networking is by enabling DWDM gear to support more channels at higher speeds.

Analysts applaud the move. "It's an excellent strategic acquisition," says Fred Wolf of Adams Harkness & Hill. Both companies continue to grow in the current environment by having leading-edge technology, he notes.

The only concern he has is that Veeco's projections could suffer as a result of the telecom downturn. But that possibility, says Wolf, isn't as great as it might be in other sectors of the market, since both companies provide such specialized technology.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com