Taiwan Stock Discussion

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Puzzling Out A Japan-Taiwan Chip Alliance
Tina Wang, 01.21.09, 11:05 AM ET

The Taiwanese memory chip industry's attempts at consolidation have been a game of musical chairs, as troubled companies continue to flirt with foreign partners in a bid to get a government bailout. The latest news reports have Japan's Elpida Memory in merger talks with Taiwanese DRAM makers ProMOS Technologies, Rexchip and Powerchip Semiconductor. But, with disparate interests to be reconciled among so many parties, it will be an uphill climb to conclude a deal.

As chip makers cope with sagging prices that are the consequence of a supply glut, Elpida Memory said on Wednesday it is "discussing several possibilities" with a number of Taiwanese chip makers. Because they are currently losing money on every chip they fabricate, the Taiwanese companies are desperate to get a piece of the up to $3 billion in bailout funds that Taipei has indicated it would make available.

But a merger involving Elpida, ProMOS, Rexchip and Powerchip Semiconductor has less than 50% chance of happening, predicted Taipei-based Primasia Securities analyst Kenneth Lee. The Taiwanese government wants the island's chip makers to incorporate more foreign technology, whereas the Japanese government will lean on Elpida to keep its trade secrets close to the vest in order to retain a commercial advantage. Powerchip Semiconductor is least troubled of Taiwanese trio and may resist giving up its independence. A three-way deal among Elpida, Rexchip and ProMOS is more likely, but Elpida's majority ownership of Rexchip would give the combined entity a Japanese identity, which would concern Taipei, Lee added.

The Taiwanese government has already told ProMOS, the neediest of the chip makers, to come back with a revised plan for an alliance with Elpida that allows for more technology transfer. Since state aid will likely be dispensed through the National Development Fund rather than the country's Finance Ministry, Taipei is concerned to see that any deal shores up the strategic competitiveness of the domestic DRAM sector.

Speculation heightened last week that Micron Technology of the United States is eyeing Taiwanese partners Nanya Technology and Inotera Memories, also in hopes of getting assistance from Taipei. (See "Micron Wants Piece Of Taiwan Bailout Pie.")

"In the context of an industry that is used to investing billions of [U.S. dollars] in a single year, both [Nanya's and Inotera's] cash reserves amount to small change, in our view. The piggy bank is almost empty," UBS's Robert Lea wrote in a Jan. 20 research note. "We think the Taiwanese Government may play a central role in bailing out the industry in the coming months."

But a restructuring would dilute the value of existing shareholders' equity holdings, as chip makers focus on survival at all costs, the note added. Lee said he expected DRAM prices to rebound to a break-even level in the second half of 2009 or first half of 2010.

At the close of trading Wednesday in Taipei, ProMOS shares were up by 9 Taiwanese cents, or 6.3%, to 1.51 Taiwanese dollars (4 cents). Powerchip Semiconductor shares were up by 20 Taiwanese cents (1 cent), or 7.0%, to 3.07 Taiwanese dollars (9 cents). In Tokyo trading, Elpida Memory shares were up by 12 yen (13 cents), or 2.3%, to 545 yen ($6.06).

http://www.forbes.com/2009/01/21/elpida-taiwan-chip-markets-equity-cx_twdd_0121markets03_print.html