Japanese chipmakers NEC Electronics and Renesas Technology are in the final stage of merger talks, four sources said, the latest shakeout in an industry wracked by a huge chip glut and a slump in prices. The move would create the world's No 3 chipmaker after Intel and Samsung Electronics and could trigger more realignment in a sector where nearly all players are losing money.
NEC Electronics shares were bid up by their 12 percent daily limit after the news. Prospects for a quick recovery in chip demand are dim amid global economic turmoil, and Germany's Qimonda has already filed for insolvency while Spansion has filed for bankruptcy protection. Japanese PC memory maker Elpida Memory is also working with Taiwanese peers to survive, with the governments of both countries looking at providing support.
Analysts say a merger of Renesas and NEC Electronics, the world's seventh- and 10th-biggest chipmakers, would be positive if they can restructure sufficiently to improve earnings. Both are expected to be deep in the red for the year ended last month. It may also help their parent companies' bottom lines, they say. The focus will be on the stock holding ratio and the next move by Toshiba and Fujitsu, which had reportedly discussed joint chip operations with NEC Electronics.
"News of the merger between NEC Electronics and Renesas is positive for share prices as this will help ensure their survival, but in the mid- to long term it just suggests their operating environment is really that bad," said Fumiyuki Nakanishi, a manager at SMBC Friend Securities.
The firms aim to merge in early 2010, said sources with direct knowledge of the matter, who declined to be identified as the information is not yet public. The Nikkei business daily said they aim to close the deal by the end of this month. NEC Electronics, 65 percent owned by NEC Corp, said in a statement no decisions have been made on reorganising operations. Spokesman Shinichi Kaede declined further comment.
Makie Uehara, a spokeswoman for Renesas, a venture between Hitachi Ltd and Mitsubishi Electric, said nothing had been decided. Both specialise in microcontrollers and system semiconductors, and the combined company would have annual sales of nearly $13 billion, surpassing Toshiba to become Japan's biggest chipmaker, data from market research firm Gartner shows.
Renesas is the world's biggest microcontroller maker, and the union with NEC Electronics would give them about 28 percent of global market share, much bigger than the 10.6 percent share of No 2 maker Freescale Semiconductor, according to research firm iSuppli.
Microcontroller chips are often used in automatically controlled devices such as car engine control systems and power tools, and are able to control several processes while minimising power consumption. System chips control multiple functions in electronics or cars and look like a maze of circuits on a single sliver of silicon.
Analysts say the companies face hurdles in making a possible merger successful. "NEC Electronics and Renesas are both strong in microcontroller and system LSIs, but many of their businesses overlap and they have too much production capacity," Nomura Securities analyst Masaya Yamasaki said in a note to clients. He said they would have to focus on reducing capacity and balancing oversupply for some time to make a merger work.
The Nikkei said NEC Electronics will be the surviving entity and will likely remain listed, and a merger would allow the companies to scrap old production lines. NEC Electronics had been widely reported to be in separate talks with Toshiba and Fujitsu on merging some chip operations, but the Nikkei said they failed to agree on management issues.
NEC Electronics' shares were awash with buy orders at 930 yen, up 12 percent from Wednesday's close, or by their daily limit of 100 yen. By 0418 GMT, NEC's shares gained 2.7 percent to 304 yen, Mitsubishi Electric's shares climbed 0.6 percent to 506 yen. Hitachi's stock rose as much as 3.8 percent in the morning, but gave up on gains and fell 2.2 percent to 306 yen.
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