As a longtime tech reporter, I was intrigued to see that one of China’s longest running M&A deals that never quite seems to happen has once again popped into the headlines, perhaps paving the way for an even bigger and sorely needed consolidation in the foundering microchip sector. Industry followers will know that of course I’m talking about a merger between Hua Hong NEC and Grace Semiconductor, both midsized players that hoped to become major forces in the contract chip-making business but never achieved the scale necessary to do that. The 2 sides, and more importantly their impatient investors, have been talking for years about a merger, but this time foreign media are reporting they have actually reached a deal, which should close by year-end. (English article) The new company will have total assets of about $1 billion, according to the report, or roughly equivalent to China’s biggest contract chipmaker, SMIC (HKEx: 981; NYSE: SMI). But considering that SMIC’s market cap now stands at about $1.4 billion and the new company would have a similar profile, this newly merged company will still be a tiny player compared with industry leader TSMC (Taipei: 2330; NYSE: TSM), with a market cap of $63 billion, and even compared to number two player UMC (Taipei: 2303; NYSE: UMC), with a market cap of $5.8 billion. A more interesting proposition would be to see this newly created company merge with SMIC to create a player that could seriously challenge UMC, at least in terms of scale. SMIC is suffering from its own issues, including a power struggle earlier this year that saw its reputable CEO get ousted (previous post), and an industry downturn that saw it slip back into the red after reporting a year of profits. (previous post) But if the Hua Hong NEC-Grace merger finally does go through, I wouldn’t be surprised to see talks begin within a year for another merger of that company with SMIC as the two companies’ backers look to create a serious new global competitor. I would still have my doubts about whether such a new company could really compete with TSMC and UMC, but at least it would have the size and customer base to make a serious attempt at putting China on the global microchip map.
Bottom line: The merger of Hua Hong NEC and Grace Semi signals consolidation in China’s chip sector may finally be underway, paving the way for a potentially even bigger merger with SMIC.
Related postings 相关文章:
◙ SMIC: Under Fire From All Directions 中芯国际亏损显示其内外交困
◙ SMIC Makes the Right Move With New CEO 中芯国际终於明智换帅
◙ SMIC: Consolidation Ahead 中芯国际任命新高管 或有助於业内合并
After a year and a half of strong performance that saw it shed its laggard image to become a profitable company under the leadership of a strong new CEO, SMIC (HKEx: 981; NYSE: SMI), China’s top microchip maker, is suddenly returning to its old ways as it comes under assault from forces both inside and outside the company. The sharp turnaround is painfully clear in SMIC’s latest results, which saw it drop sharply into the loss column — territory it was well familiar with for most of its life until CEO David Wang led it into profitability following his arrival at the struggling firm in late 2009. (
After a tumultuous few months that saw its shares lose half their value amid an internal power struggle, leading Chinese microchip maker SMIC (HKEx: 981; NYSE: SMI) has finally made a smart move by naming an apparently capable outsider as its new CEO (
from that part of China, which has also seen neighboring cities like Xian and Chongqing grow quickly as China offers strong incentives for companies to set up shop in its relatively underdeveloped western interior. As a longtime tech writer, I’ve been particularly impressed with Chengdu, which seems to have a strong ability to attract some of the world’s top-tier technology names to the city with its abundance of college graduates, good transport networks and of course its tasty Sichuan food. Intel (Nasdaq: INTC) was one of the earliest players in the city when it set up a chip manufacturing plant there seven years ago, and Texas Instruments (NYSE: TXN) opened up shop in the city last year when it took over a plant from SMIC (HKEx: 981; NYSE: SMI). Most major PC players have also opened plants there in the last 2-3 years, including both Hewlett Packard (NYSE: HPQ) and Dell (Nasdaq: DELL), (
frequent subject of merger talk with SMIC or venture-backed Grace Semiconductor, another smaller struggling player. In fact, David Wang was a former CEO of Huahong NEC, but was clearly only an executive at the company and probably had little clout to pursue an acquisition of his former company after arriving at SMIC in late 2009. Zhang, on the other hand, as chairman of both SMIC and Huahong, is in a perfect position to push such consolidation, and perhaps even bring Grace into the mix, as that company’s stakeholders have long wanted to sell off the investment. If all goes according to plan, I would expect to see SMIC merge with Huahong NEC in the next 12 months, and perhaps also with Grace during that time, to create the world’s clear number-three contract chipmaker. Handling such a difficult merger would be tough for the most experienced of executives, and will be even more difficult for whoever SMIC names as its new CEO. For that reason, I’d look for lots of problems with this company over the next two years, and high volatility in its share price as it seeks to find its new footing.
