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Philips Electronics, Semiconductors likely to merge for chip unit

Posted: 19 Jan 2006     Print Version  Bookmark and Share

Keywords:Junko Yoshida 

Royal Philips Electronics, which last month announced plans to spin off its semiconductor business by mid-2006, has confirmed it wishes to pursue a merger for Philips Semiconductors, but remained quiet about potential partners.

The possibility of an out merger rather than a simple sale or an initial public offering of shares was first set forth in a Webcast Philips Semiconductors presented to financial analysts on Dec. 15. During the conference, Philips Electronics executives declined to comment on whether STMicroelectronics and Infineon Technologies were in the running as potential partners.

Indeed, the name of any possible merger partner is unlikely to be disclosed before the second half of 2006, though the Dutch giant did confirm recently that its partnership pursuit is moving forward in parallel with its internal efforts to sort out its chip division's legal entanglements. In an interview with EE Times at the Consumer Electronics Show, Frans van Houten, CEO of Philips Semiconductors, said the objective of establishing a separate legal structure for the chip operation is to achieve "scale." Referring to chip makers Freescale and Infineon, which were spun out of larger companies (Motorola and Siemens, respectively), van Houten said spinning off a separate company or pursuing an IPO "is not the same as gaining scale."

Consolidations in the semiconductor industry are "unavoidable," van Houten observed, adding that Philips would rather make the first move "than be a wallflower." In a competitive semiconductor market, he said, Philips could slip into the "second tier" unless it continues to increase in size. In fact, Philips may already be unable to afford its desired level of R&D investment for its target markets in automotive and consumer electronics, mobile gear and telecom. "The diversity of solutions required for applications in each product line is not getting smaller," acknowledged van Houten. "Scale matters."

Philips Semiconductors failed to make market researcher Gartner Inc.'s Top 10 list of chip companies in 2005, after having finished ninth in 2004. Philips "was pushed out of the Top 10 [last year] for only the fifth time in the last 25 years," said research vice president Andrew Norwood at Gartner.

Some industry observers have identified STMicroelectronics as the most likely merger partner for Philips' chip unit, observing that ST and Philips already share a research facility in Crolles, France. But van Houten called the Crolles partnership "a loose alliance," describing its efforts as "pre-competitive" and focused on manufacturing process technology. Philips Semiconductors, he said, needs a partner to help it build scale in its targeted market segments.

Design is costly enough
The cost of next-generation R&D and fab construction traditionally poses the greatest challenge for chip makers.

Lately, platform and applications development has also demanded a "huge investment," said van Houten, citing the industry activity under way in such areas as "Wi-Fi, USB, 3G stacks and high-speed downlink packet access."

Philips has already cancelled a number of product development projects. Pullbacks have occurred in imaging, DVD recording and small-display drivers. Philips is ending development and delivery of DVD recorders, but the chip unit will continue producing DVD-R back-end chips in cooperation with Philips' consumer electronics unit.

Apart from Renesas, a merger of the chip divisions of Hitachi and Mitsubishi, van Houten said he could cite few models for a successful chip merger. Even Renesas, if it had "really wanted to grow big-go for scale-should have merged with a non-Japanese player in the semiconductor market," he said.

Given its highly diversified product line, Philips may struggle to find the ideal partner for building scale in all its core businesses, some sources said. "The best-case scenario" for Philips-albeit "by far the hardest route"-would be to "find a willing partner for a merger first, and then spin off strong product lines as separate companies," said an observer of Philips Semiconductors who asked not to be identified.

Would a fabless chip company be interested in the merger? Philips' fabs could be more baggage than advantage, several fabless chip house managers said. Other sources speculated that a Chinese partner would emerge, but no names along those lines have surfaced. While Philips had been under pressure to adjust its chip business model for years, it wasn't until van Houten rose through the ranks that merger talk gained currency inside the company. "I was the first one to align all the stakeholders," van Houten said.

The 45-year-old executive, who is not an engineer, holds a master's degree in economics and business management. He has been on Philips' management fast track, having received key international assignments over the past two decades in the United States, Germany, Belgium, Sweden, the Netherlands and Singapore.

- Junko Yoshida
EE Times

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