Applied Materials and Francisco Partners have decided to end negotiations to acquire a key part of the wafer processing division of ASM International, Europe's second-largest maker of semiconductor equipment.

Applied Materials and Francisco Partners had, in June, made an unsolicited offer for Netherlands-based ASMI and its subsidiaries, which design and manufacture equipment and materials for making semiconductor devices. It had then offered to acquire the atomic-layer deposition (ALD) and plasma-enhanced chemical vapor deposition (PE-CVD) units between $400 million and $500 million. (See: Applied Materials offers up to $500 million for part of Netherland's ASMI) 

ASMI had rejected the bid saying it undervalued the company. Applied Materials and Francisco Partners then raised the stakes and made an offer of $800 million for all of AMSI's front-end businesses which was also rejected.

Both Applied Materials and Francisco Partners have not given any reasons for pulling out of the deal although observers had not anticipated the deal to go through under the current market crisis.

The chip market, which represents approx 50 per cent of the overall semiconductor equipment industry, is also over supplied because of increased capacity in manufacturing.

Midway during the negotiations, Chuck del Prado, CEO of ASMI, withdrew himself from the talks and the company appointed CFO Arnold van der Ven in his place as the chief negotiator with Applied.

The ALD and PE-CVD operations that Applied wanted to buy, account for 30 to 35 per cent of ASMI's front-end revenue of around 451 million pound ($704 million) last year.

Applied Materials, the largest maker of chip-production machinery, wanted to gain greater access to ASMI's largest customer, Intel Corp. ASMI has been Intel's main low-k dielectrics equipment vendor for long and some believe that Intel may have pushed for the deal.

Intel is also using ASML's equipment on a bigger front: high-k. Like low-k, Intel's main equipment vendor for high-k is ASMI, industry sources said.

Applied Materials reported a 45 per cent drop in fourth-quarter profit and said it would cut 1,800 jobs as the economic slowdown worsens and orders decline.