TELECOMS: Unigroup’s Powertech Buy Tests Cross-Strait Tech M&A

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Bottom line: Taiwan should quickly approve Tsinghua Unigroup’s plan to buy a quarter of Taiwan’s Powertech for $600 million if it finds no security issues, which could help to accelerate cross-Strait high-tech M&A deals.

Unigroup, Powertech in cross-Strait microchip tie-up

One of the biggest equity tie-ups to date between high-tech companies across the Taiwan Strait was announced late last week, when the acquisitive Tsinghua Unigroup said it planned to buy a quarter of Taiwanese chip company Powertech (Taipei: 6239) for around $600 million. The deal would provide Unigroup with valuable production assets in its drive to build a major new global chip maker, and would give Powertech cash and other resources as it fights for advantage in the highly competitive chip sector.

And yet despite the obvious rationale for such a deal, only a handful of similar tie-ups have occurred to date due to the risks of getting vetoed by Taiwan on national security grounds, since they involve sophisticated technology.
Taiwan and China should quickly approve this latest deal, which comes in a relatively mature and lower-tech area of the chip sector, to send an important signal that this kind of tie-up will be routinely welcome in the future. Such a move might require some work from both sides, including assurances from the companies and their respective governments that such a tie-up is purely commercial and won’t become politicized.

Quick approval would not only improve the business climate across the Taiwan Strait, but could also accelerate the number of similar tie-ups for many Taiwanese tech firms that suffer from small size and a small home market that undermines their competitiveness. It would also erase a major geographic barrier to much-needed consolidation that is currently sweeping the global semiconductor industry.

Many had high hopes for cross-Strait high-tech mergers, after relations between the 2 sides began to improve considerably starting in 2008 under a new China-friendly leadership in Taiwan. But those hoping for fast progress were quickly disappointed when an early deal that would have seen top Chinese mobile carrier China Mobile (HKEx: 941; NYSE: CHL) buy 12 percent of Taiwan peer Far EasTone (Taipei: 4904) stalled and ultimately collapsed over national security concerns.  (previous post)

Since then Taiwan has issued a set of guidelines clarifying what types of investment will be allowed. That has paved the way for 2 at least equity tie-ups between Chinese firms and their Taiwan counterparts in the light emitting diode (LED) and display spaces over the last 2 years. Both deals were relatively small, worth $70 million or less, though one saw the Chinese side buy 46 percent of its Taiwanese peer.

Milestone Deal

This latest deal would easily trump both of those in terms of price, with Unigroup prepared to pay T$75 ($2.30) per share for 25 percent of publicly listed Powertech worth $600 million. (English article; Chinese article) The large size of the deal and of Powertech itself, which has 11,000 employees in Taiwan, could both cause the plan to draw extra scrutiny from Taiwan’s regulator that reviews such cross-Strait transactions.

Powertech offers test and packaging services for high-tech chips, a well-established area that is also highly competitive. Reflecting that stiff competition, the company reported a large loss of about $100 million in 2013, though it returned to profitability last year. But its sales and profit both fell in its latest reporting quarter, showing that competition remains stiff. Accordingly, it could benefit from the cash and other resources that Unigroup would bring as its new major stakeholder.

For Unigroup, the move is part of a recent global buying spree, as it attempts to build a major microchip maker in the consolidating semiconductor industry. The company has signed recent equity tie-ups with US technology leaders Intel (Nasdaq: INTC), Hewlett Packard (NYSE: HPQ) and Western Digital (Nasdaq: WD), and Western Digital itself bought flash memory maker SanDisk (Nasdaq: SNDK) shortly after its Unigroup tie-up. But Unigroup also hit a major obstacle when it scrapped a $23 billion bid it was weighing for leading US memory chip maker Micron (Nasdaq: MU), after several powerful Washington politicians expressed reservations over national security concerns. (previous post)

This latest deal is far smaller than the Micron bid, even though it would still mark one of the largest high-tech tie-ups across the Taiwan Strait to date. This deal also differs from the Micron bid because it comes in a relatively low-tech segment of the chip-making ecosystem, and only involves the purchase of a minority stake rather than the company outright.

For all those reasons, Taiwan regulators should give their approval for the purchase if it poses no real security risk, even though they may feel some local pressure to block it. Unigroup could also play its part by doing showing its motivations are purely commercial and don’t have any political overtones despite its own close connections to Tsinghua, China’s leading sciences university.

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