CHIPS: China Resources Re-enters Bidding for Fairchild

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Bottom line: Fairchild’s decision to negotiate a potential sale of the company to China Resources looks like a bargaining tactic to force previous suitor ON Semiconductor to sweeten its earlier bid.

Fairchild opens sale talks with China Resources

In a move that comes as a bit of a surprise, high-tech chip maker Fairchild Semiconductor (NYSE: FCS) has indicated it is open to selling itself to a Chinese buyer after previously appearing to reject an unsolicited bid from China Resources. The move comes as China looks to beef up its chip-making capabilities through an M&A campaign aimed at buying up companies and their technology in the consolidating global semiconductor market.

Fairchild had previously agreed to be purchased by US rival ON Semiconductor (Nasdaq: ON), and last month it rejected an unsolicited bid from a group that was reportedly led by China Resources, one of China’s oldest and largest conglomerates. So this change of tune could indicate Fairchild is open to acquisition by a Chinese buyer. But it could also be a bargaining ploy to get a higher price from ON.

The latest development in this story comes from Fairchild, which has said that it received a revised offer from an unnamed party to buy the company at $21.70 per share. That figure is sharply higher than ON’s bid of $20 announced in November. (English article) News reports say the new revised bid comes from China Resources, and contains the same price reported when the Chinese company first approached Fairchild back in December.

It appears that perhaps China Resources’ original bid had some problems that prompted Fairchild to reject the offer, and now those problems have been resolved. Fairchild said it expects to open negotiations with the new bidder, and that such talks should lead to a higher offer price. Fairchild shares rose 3.5 percent to close at $21.19 in the latest trading session, indicating investors believe a bidding war could be coming.

Bargaining Tactic?

Frankly speaking, I would stand by my earlier assertion that Fairchild doesn’t want to be acquired by China Resources and is simply taking its latest step as a bargaining tactic to get a better price from ON. China Resources is a conglomerate that’s far better known for its consumer products and convenience stores than high-tech prowess, though the group  does own at least one company in the chip business.

China Resources’ new interest in chips comes as China tries to build up its own domestic semiconductor industry by buying overseas assets, following years of failed attempts to develop homegrown technology. Beijing-based Tsinghua Unigroup has been the biggest acquirer to date, purchasing a wide range of assets including major stakes in US hard drive maker Western Digital (NYSE: WDC) and a number of Taiwanese chip companies.

Beijing has given Unigroup access to billions of dollars to fund its acquisition spree, and now it appears that similar funds may be available to other potential buyers like China Resources. The latest bid values Fairchild at $2.5 billion, a sum that would be relatively affordable for such a large company like China Resources even without help from Beijing.

But while China Resources may have more money to offer Fairchild, ON would certainly have far more resources to ensure the US company’s future after a merger. The 2 companies are both from the US chip sector and thus are quite familiar with each other and share similar corporate cultures. By comparison, Fairchild would be walking into a very uncertain future by placing its bets with China Resources, a company with a very different background as a vast state-run Chinese conglomerate.

All that said, I really do think we’ll see ON try to at least match the China Resources bid, and probably even offer a small premium. The case would mark an interesting development for the global chip sector’s consolidation, because it would bring in a new group of aggressive Chinese buyers who could spark bidding wars for future assets. That could be good news for companies trying to sell themselves, allowing them to get better prices for their shareholders.

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