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Mr. Market and ASM International
Investment Strategy | 6 Comments | Thu 03 May 2012
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In 2008 Applied Materials was prepared to pay up to $800m for a business that "Mr. Market" is currently giving away for free. This article analyses this business to try to determine whether Applied Materials was too euphoric or whether Mr. Market is currently a manic depressive.



Comments

1.
On 05/05/2012 20:49:02, rowan wrote:
Thanks for an interesting article. With regards to the apparent mispricing, could taxation explain some or all of this? Perhaps a substantial unrealised gain on the investment in ASMP diminishes the after-tax value of ASMI's holding in ASMP (in the event of a sale)? These tax matters can be complex depending on local and foreign tax rules and double tax agreements. Also is there a double tax effect on dividends paid from ASMP to ASMI? A shareholder in ASMP presumably pays tax on dividends received but does a shareholder in ASMI pay this tax twice? (tax on ASMP -> AMSI dividend, then tax on the same cash as it is transferred via dividend from ASMI to its shareholders). If so, this would reduce the implied value of the parent company.

One more observation, perhaps you are not being that conservative valuing ASMI parent at zero. Afterall it made no profit in aggegate in the past 5-6 years. The value of ALD and the sustainability of ASMI's position here are unclear.

2.
On 07/05/2012 11:41:27, Graeme Kyle wrote:
Thanks for the article. Rowan makes a good point re capital gains and dividend taxes and how this can diminish the realisable value of an asset. Also consider the following,
- As per article caveat, is ASMP simply being mis-priced by the market? Possible explanations include poor share liquidity/ scarcity value/ index inclusion at 100% of market cap etc.
- Is the market entitled to value the parent company at zero or negative due to the atrocius returns through the cycle, ageing technology, and the poison pill that exists to prevent change. Its conceivable that the parent company will continue to exist ad infinitum and consume shareholder capital for little or no return.
- Are there accounting irregularities at ASMI we don't know about?

I also think the Applied Materials bid can be discounted. Since in partnership with private equity I am guessing it was highly leveraged and designed principally to benefit the debt providers over a finite 3-5 year period. Post Lehman the higher coupon rate on the debt alone would probably make it unworkable.

3.
On 07/05/2012 16:23:13, Ken wrote:
With regard to dividends ASMI receive ASMP dividends without any witholding tax. (The €65.6m received in 2010 is consistent with this)
With regard to tax on a sale of ASMP shares I know that one investment bank used a 10% tax in their model. I presume this accurately reflects the situation but I will ask ASMI in order to verify this.
With regard to the fact that they made no profit in aggregate in the past 5-6 years I just want to point out that other semiconductor equipment companies listed in the appendix such as DaiNippon Screen and Hitachi Kokusai have had a similar poor profit performance and they are valued above zero. Perhaps Mr. Market is being too positive about all of them but I genuinely believe that other equipment companies would put a positive value on ASMI.

4.
On 09/05/2012 15:52:23, rowan wrote:
Ken, thanks for the response. Not to beat a dead horse but in relation to dividend income, when ASMI "recycles" the ASMP dividend by distributing this cash to its shareholders, do these ASMI shareholders pay tax on the dividend? Probably not a straightforward answer but if there is tax payable here versus none on the direct ASMP dividend this would undermine the value of the holding company structure.

5.
On 10/05/2012 13:35:26, Ken wrote:
I can only answer from the perspective of an Irish tax payer.
The Dutch tax man takes a 15% witholding tax on ASMI dividends and the Irish tax man takes this into account when he charges tax at the marginal rate (Double tax agreement between Ireland and Holland).
The Hong Kong tax man does not have witholding tax but dividends on ASMP shares would be taxable by the Irish tax man at the marginal rate. I therefore think that ASMP dividends received directly or through ASMI end up being taxed at the same rate.
A complicating factor is possibly created by ASMI using ASMP dividends for share buybacks rather than dividends.

6.
On 17/05/2012 11:38:25, Ken wrote:
At the ASMI AGM held this week a decision was made to look at ways of unlocking value.
Here is a link to the Bloomberg story:http://www.bloomberg.com/news/2012-05-15/asmi-s-founder-del-prado-is-open-to-company-s-breakup.html

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