UPDATE 3-Applied Materials to buy Tokyo Electron as chip gear sector slows
* Applied Materials shareholders to hold 68 pct of new company
* Companies says deal would create entity with market value of $29 bln
* Applied CEO to lead new company
* Applied shares rise more than 7 percent
Sept 24 (Reuters) - Applied Materials Inc <AMAT.O will buy rival Tokyo Electron Ltd in a deal valued at more than $9 billion, combining the No.1 and No.3 makers of chipmaking gear as demand for their products slow and it gets tougher to turn a profit.
The all-stock deal will create a new company valued at about $29 billion that would be 68 percent owned by Applied Materials shareholders, the companies said on Tuesday.
Applied Materials shares rose 7.4 percent in morning trading on the Nasdaq. The announcement came after close of trading in Tokyo, where Tokyo Electron shares ended 0.4 percent higher.
The deal is the biggest-ever for Applied Materials, whose last big acquisition was Varian Semiconductor Equipment Associates for $4.9 billion in 2011.
Other chip gear makers have also been busy. Dutch chip equipment maker ASML bought U.S.-based peer Cymer last year for about $2.5 billion, while Lam Research Corp bought smaller rival Novellus Systems Inc for $3.3 billion.
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 said. "So they are not desperate, but they are hungry for earnings growth and this is one way they can do it."
Applied Materials' net income has been falling steadily on a year-over-year basis over the past two years and the company has posted losses in two quarters in that period. Tokyo Electron reported a 23 percent drop in quarterly sales in July.
"Applied Materials is going to be the biggest beneficiary from this deal, given that they're going to be a large company and I think their customer exposure also improves following this deal," Stifel Nicolaus & Co analyst Patrick Ho said.
ANTI-TRUST SCRUTINY LOOMS
The companies said they expected the deal to close in the middle to second half of next year, noting they would face regulatory scrutiny in a number of countries.
Rubenstein said etching and deposition equipment were areas that might grab regulators' attention.
However, Tokyo Electron Chief Executive Tetsuro Higashi played down possible anti-trust issues, saying there was limited overlap in their product lineups.
Close competitors of the new combined company would include Lam Research, KLA-Tencor Corp and Hitachi Ltd subsidiaries Hitachi High-Technologies Corp and Hitachi Kokusai Electric Inc.
For every existing share, Tokyo Electron shareholders will receive 3.25 shares of the as-yet unnamed new company, and Applied Materials shareholders will receive 1 share.
Applied Materials CEO Gary Dickerson will be chief executive of the new company and Tokyo Electron's Higashi will become chairman. The companies said they would maintain dual listings on Nasdaq and the Tokyo Stock Exchange.
Dickerson, in a conference call with analysts, said he would move to Japan to lead the company, whose board will be made up of 11 directors -- 5 directors appointed by each company and another they both agree on.
The companies said they expected to achieve $250 million of savings by the end of the first fiscal year of operation of the new entity. The new company will also buy back $3 billion of its shares within 12 months of the combination, they said.
Analysts and bankers said the deal took them by surprise, although Tokyo Electron's stock price has surged 14 percent over the past week, compared with only a 2 percent rise in Tokyo's Nikkei share average. Applied Materials' shares have risen 0.5 percent over the same period.
Applied Materials' shares were up 7.4 percent at $17.18 in late morning trading after hitting a high of $17.42.
Goldman, Sachs and Co acted as Applied Materials' financial adviser, while Tokyo Electron was advised by Mitsubishi UFJ Morgan Stanley Securities Co.
Legal firms Jones Day and Nishimura & Asahi represented Tokyo Electron. Weil, Gotshal & Manges LLP, Mori Hamada & Matsumoto, and De Brauw Blackstone Westbroek advised Applied Materials.