By Emi Emoto and Junko Fujita
TOKYO (Reuters) - U.S.-based Applied Materials Inc (O:AMAT) on Monday scrapped its $10 billion planned takeover of chip-making gear rival Tokyo Electron Ltd (T:8035) after the deal, a rare foreign bid for a Japanese firm, fell foul of U.S. anti-trust regulators.
The all-share purchase would have combined the No.1 and No. 3 makers of the equipment that makes semiconductor chips into a group with a stock market value of more than $38.5 billion.
Tokyo Electron said both companies gave up on the deal after more than 18 months of talks after it became clear that differences with the U.S. Justice Department could not be bridged.
The reasons for the regulator's decision were not immediately clear, but California-based Applied Materials said the U.S. authorities had deemed insufficient a proposal to address antitrust concerns.
"We must take with humility the result that we could not convince the regulators," Tokyo Electron Chief Executive Tetsuro Higashi told reporters. "The termination of the merger is a very regrettable outcome, but it does no good to mourn."
Applied Materials, Tokyo Electron and No. 2 maker, ASML Holding NV (AS:ASML), hold 49 percent of the global market, according to market research firm Gartner, in an industry where the rising cost of developing chips, coupled with slowing semiconductor demand, are forcing alliances and acquisitions.
The pan-Pacific deal, announced in September 2013, would have been a rarity because the combined entity would have been listed in New York and Tokyo but incorporated in the Netherlands, home of ASML.
Analysts had initially expected the takeover, aimed at spurring profit growth in both companies, to stand up to regulatory scrutiny.
The unraveling of the deal is worse for Tokyo Electron, said a Tokyo-based mergers and acquisitions lawyer, as takeover targets often lose management focus, and customers, during the negotiation period. CEO Higashi said Tokyo Electron would be "flexible in considering alliances with others in the future".
To appease shareholders, both companies announced share buybacks. Applied Materials said it would buy up to $3 billion worth of shares over three years and Tokyo Electron said it plans to buy as much as 120 billion yen ($1 billion) worth of shares, or 8.59 percent of its outstanding stock.
No termination fee would be payable by either party, Applied Materials said.
Many U.S. chipmakers have sold or mothballed capacity and outsourced manufacturing to Asian foundries such as Taiwan Semiconductor Manufacturing Co (TW:2330), further eroding Applied Material's customer base.