Applied Materials and Tokyo Electron Call Off $10 Billion Merger

TOKYO — Two of the world’s largest manufacturers of the machinery used to produce semiconductors, Applied Materials of the United States and Tokyo Electron of Japan, on Monday dropped plans to merge after the Department of Justice said that combining their businesses would restrict competition.

The proposed $10 billion deal was announced in September 2013, but the companies had struggled to come up with a plan the American antitrust authorities would approve. It would have combined two of the three largest players in a sector crucial to the production of modern electronic devices, from smartphones to televisions.

Microchip factories are becoming increasingly large and costly to build, even as prices for the tiny chips they produce are steadily tumbling. Pressure on suppliers of chip-making machinery is intense, and the industry has consolidated into a clique of large, technically sophisticated groups.

By joining forces, Applied Materials and Tokyo Electron had hoped to streamline research and development operations and benefit from greater manufacturing scale. They had also planned to save tens of millions of dollars in taxes by incorporating the new company in the Netherlands.

“Their goal was to conserve resources and avoid some duplication, and it was a way for them to tackle design challenges because they would have had more resources,” said Randy Abrams, a semiconductor analyst at Credit Suisse.

But the Department of Justice appears to have drawn a line on the amount of consolidation that it judges is good for the companies’ customers and, ultimately, consumers.

It was the second big merger deal to collapse in a week over antitrust concerns. Comcast last week abandoned its planned $45 billion takeover of Time Warner Cable in the face of skepticism from the Department and the Federal Communications Commission, ending a bid that would have joined the United States’ two largest cable operators.

If Applied Materials, the larger of the two chip-equipment companies, had been allowed to take over Tokyo Electron, it would have been the biggest acquisition of a Japanese corporation by an American company outside the financial industry.

“Based on the DoJ’s position, Applied Materials and Tokyo Electron have determined that there is no realistic prospect for the completion of the merger,” Applied Materials said in a news release issued early Monday in Asia, late Sunday United States time, referring to the Department of Justice.

Tokyo Electron, in a separate release, said, “There remains a gap between the view of Tokyo Electron and Applied Materials and the view of the United States Department of Justice, and it becomes apparent that such gap will not be able to be bridged.”

Mr. Abrams said the consolidation in the chip-making machinery industry was being echoed in the wider semiconductor industry as the cost of making improvements in the highly technical industry continues to rise. The proposed new company would likely have enjoyed greater negotiating power with its chip-making clients, particularly on pricing.

The deal would have saved on taxes through a technique known as an “inversion,” in which companies that are transformed through mergers or acquisitions reincorporate in lower-tax jurisdictions.

When the plan was announced in 2013, Applied Materials and Tokyo Electron said the new entity’s effective tax rate would drop to 17 percent from 22 percent as a result of shifting its base to the Netherlands, saving it perhaps $100 million a year based on the latest profit figures at the time.

“We viewed the merger as an opportunity to accelerate our strategy and worked hard to make it happen,” Gary E. Dickerson, chief executive of Applied Materials, said in the company’s release.

Mr. Dickerson had planned to move to Tokyo to run the combined company. It would have been a delicate cultural integration: though Applied Materials shareholders would have owned the majority of the business, executives sought to cast the deal as a merger of equals.

The company, which would have been worth about $29 billion, would have been managed from Japan as much as Applied Materials’ home in Silicon Valley and Tokyo Electron’s chief executive, Tetsuro Higashi, was to have become chairman.

Major chipmakers like Samsung Electronics and Taiwan Semiconductor Manufacturing Company will probably not be hurt by the deal’s failure, at least for now, Mr. Abrams said.

“For Asian manufacturers, they didn’t necessarily see a big shift that would happen after this to their suppliers,” he said.