Taiwan Stock Discussion

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Taiwan's DRAM Merging Cannot Happen Fast Enough
Vivian Wai-yin Kwok, 03.06.09, 04:58 AM EST
Government plan to set up a new company to consolidate the country's struggling semiconductor industry may be too late for struggling producers.
Taiwan’s individual DRAM chip makers may go bankrupt before the government has time to implement its plan, disclosed this week, to promote consolidation in the ailing industry by setting up a new company in the second half of this year.

Shares of Taiwanese computer memory chip makers tumbled on Friday, with the largest, Powerchip Semiconductor, sliding by 28 New Taiwan cents (1 cent), or 6.85%, to 3.81 New Taiwan dollars (11 cents), and its major rival, Nanya Technology Corp., losing 37 New Taiwan cents (1 cent), or 5.8%, to 6.03 New Taiwan dollars (17 cents), at the close, a day after Taipei officials unveiled preliminary plans to restructure the industry. The broader Taiex weighted index picked up 16.43 points, or 0.35%, to 4,653.63.

Under the government’s blueprint, a new entity named Taiwan Memory Co. will be formed over the next six months to pull together Taiwan’s struggling computer memory chip makers. Taiwan Memory Co will merge the production capacities of various manufacturers, combine research teams, develop independent technology and expand brand marketing, so as to raise the sector’s competitiveness against South Korea's Samsung Electronics (other-otc: SSNLF - news - people ) and Hynix Semiconductor (other-otc: HXSCF - news - people ), the world’s top DRAM producers. The Taiwanese state will hold less than a 50% stake in Taiwan Memory Co., and the company will choose either Japan's Elpida Memory (other-otc: ELPDF - news - people ) or the United States’ Micron Technology (nyse: MU - news - people ) as a technology partner in the next three months.

No further details were disclosed Thursday. Goldman Sachs noted that Taiwan's focus is on rescuing the entire DRAM industry rather than supporting individual DRAM companies. "We believe hurdles that Taiwan DRAM companies are currently facing include a rising debt burden and technology dependency on foreign partners," the brokerage said in a research note released Friday, adding that “the government's aim is to address the latter hurdle."

Goldman Sachs estimated that it would take around 170 billion New Taiwan dollars ($4.9 billion) to convert the total capacity of Taiwan’s 12-inch DRAM wafer fabrication plants to 50-nanometer circuit-etching technology in order to be competitive with the cost leader, Samsung Electronics, which is gradually moving into 50 nm. “The balance sheets and cash flow positions of Taiwan’s DRAM companies’ have deteriorated significantly over a two-year downturn, preventing these companies from focusing on technology migrations,” the Goldman analysts wrote.

Because the government does not intend to inject capital into firms, the newly formed company is expected to use equity instead of cash to absorb their production facilities. DRAM producers with heavy debt loads may not be able to survive until or even beyond the consolidation.

Peter Yu, an analyst with BNP Paribas Securities Korea, predicted that Taiwan Memory Co. may face an operational nightmare merging different technology platforms across various facilities, based on the the history of the merger of Hyundai Electronics and LG Semicon, which formed Hynix Semiconductor in 1999. "The Hyundai-LG Semicon merger took almost four years to come up with a common technology platform and enjoy the post-merger synergy. It nearly went bankrupt during the lengthy process,” he said.

To reduce the cost of the restructuring, Morgan Stanley said, Taiwan Memory Co. quickly has to make an “either or” decision between Elpida Memory and Micron Technology as the foreign partner as Taiwan to help with research and development issues as it strives for critical mass. “Learning from the cheerless experience of the past 15 years with multiple technology sources (Mitsubishi, Toshiba, Infineon, Oki, Qimonda, Elpida, Hynix, Micron, etc), Taiwan only needs one globally competitive DRAM company. Given that the DRAM industry is ex-growth, we continue to believe the best exit/survival strategy for the Taiwan DRAM sector is a super merger,” the brokerage remarked.

http://www.forbes.com/2009/03/06/taiwan-dram-consolidation-markets-equity_merger.html