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Merger to Create Premier Photonics Microengineering and Metrology Systems Company

Published on October 17, 2008 at 4:10 PM

Electro Scientific Industries, Inc. and Zygo Corporation announced today that they have entered into a definitive agreement under which the companies will merge in an all stock transaction. This merger combines two photonics-based technology leaders, possessing complementary technologies and strong brand names-ESI is a leading provider of world-class photonic microengineering solutions, while Zygo is a leader in the field of high-precision metrology solutions and optical systems. Revenues for the combined company for calendar year 2007 were approximately $458 million. This combination creates new growth opportunities, increases the scale of the combined companies, and mitigates business cyclicality through market segment diversification.

Under the terms of the merger agreement, Zygo shareholders will receive 1.0233 shares of ESI stock for each share of Zygo stock, in a tax-free transaction. Based on yesterday’s closing price of ESI stock, this represents a value of $10.30 per share of Zygo common stock. Upon closing, ESI will issue approximately 18.1 million shares on a diluted basis to complete the transaction, resulting in 40% Zygo shareholder ownership of the combined company.

“The combination of ESI and Zygo accelerates our growth strategy by combining the core competencies and market presence of two innovative leaders in the field of photonic-based solutions,” remarked Nick Konidaris, president and CEO of ESI. “Zygo’s precision metrology systems greatly enhance ESI’s portfolio of differentiated laser microengineering technologies. ESI possesses substantial strengths in the area of systems design and high volume production support that will strengthen the partnership and better address the needs of our global customers. The combination of the two companies will create a premier photonic microengineering and metrology systems company.”

“Leveraging ESI’s systems expertise, which spans systems design, sales and support infrastructure, and market knowledge, should allow us to better execute on Zygo’s growth strategy that is centered around integrating our world-class metrology and optics technologies into in-line system solutions,” added Bruce Robinson, chairman and CEO of Zygo. “Given our complementary nature, similar culture, and the ability of each company to help the other achieve its strategic goals, we have decided now is the right time for us to come together. In our view, this is a compelling transaction for Zygo’s shareholders, and it should provide us with the resources we need to realize the full market potential of our technologies.”

Konidaris continued, “Although the merger provides many technical and competitive advantages, the largest creation of value will be in combining the talent and superior technical expertise of two great organizations.”

“We believe this merger delivers significant value to the shareholders of both companies. Based on estimated synergies of $5-7 million from revenue projections and annual cost savings, the merger is anticipated to be accretive on a non-GAAP basis in the first full fiscal year of combined operations. As a result of the complementary nature of the technologies, there is little product or technical overlap, reducing risks typically associated with integration. In addition, this merger accelerates our existing growth strategy by extending our presence into adjacent markets in the microelectronics, medical, industrial, security and defense sectors. Finally, combining the resources of these two industry-leading companies will provide the size and scale to make strategic investments and to better compete in today’s challenging international markets,” concluded Konidaris.

The merger is subject to approval by both companies’ stockholders, as well as the satisfaction of customary closing conditions and regulatory approvals. The board of directors at each company has unanimously approved the merger agreement. The companies expect the transaction to be completed in the first calendar quarter of 2009. Following closing of the transaction, the board of directors of ESI will be comprised initially of eleven members, three of whom will be designated by Zygo.

Contingent upon the close of the merger, the Board of Directors of ESI has approved an increase to the existing share repurchase program to $100 million of outstanding ESI common stock. The repurchases will be made at management’s discretion in the open market in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. There is no fixed completion date for the repurchase program. The Company has repurchased approximately $4.7 million against the existing authorization.

Needham and Company acted as financial advisor to ESI in the transaction. Goldman Sachs acted as financial advisor to Zygo Corporation.

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