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Renesas-NEC merger: a good deal?

Posted: 21 Apr 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Renesas NEC merger? Japan chipmaker? microcontroller?

Loss-ridden Japan chipmakers NEC Electronics Corp. and Renesas Technology Corp. are reportedly in talks about a merger.

Does this deal make sense? No, according to one analyst. The merger of NEC Electronics and Renesas would have a dominate position in microcontrollers, but there would be huge integration issues, according to an analyst.

Renesas was ranked as the world's sixth largest IC vendor with $7.017 billion in sales in 2008 while NEC ranked 11th with $5.826 billion in sales last year, according to iSuppli Corp. In total, the merger would result in a company with over $12.8 billion in sales, putting it in third place behind Intel Corp. and Samsung Electronics Co. Ltd.

Renesas and NEC were the world's first and third largest MCU vendors in 2008, respectively, according to Databeans Inc. Renesas had 20.1 percent share in 2008, while NEC had 9.7 percent, according to the firm.

Renesas also makes analog products, SoC devices, wireless ICs and others. NEC makes ASICs, consumer chips and other products.

Sound deal?
"Merging with NEC's MCU operations would give this one vendor an unheard-of 30 percent market share of microcontrollers in a market where the biggest of 30 vendors barely trip into double-digit market shares," said Tom Starnes, an analyst with market researcher Objective Analysis.

"Although there may indeed be merger talks between Renesas and NEC, we see little of the traditional benefits from a prospective merger between these two firms," Starnes said in a report. "It is no small chore to gain a benefit from the merger of two large microcontroller vendors."

There are more negatives than positives in such a deal. "Considering the broad offering of today's Renesas as well as NEC, most of the products seem to overlap rather than provide new synergies," he said. "Without paring down of overlapping families, it will be difficult to provide much financial gain."

There are other problems. "Manufacturing costs can be improved by driving more chips through the fabs, but first any newly-acquired chips have to be reconfigured for the new process node in the faba very resource-intensive effort. Two companies cannot just be slapped together and see immediate, or even short-term financial benefits," he argued.

Still, some observers believe that a merger between Renesas and NEC could take place this year. Both companies are in deep trouble, and can no longer operate as stand-alone entities amid the current IC downturn.

Toshiba Corp., which recently said it may spin off its system and discrete chip operations, is reportedly in discussions to combine its system chip business with NEC. Toshiba has denied those rumors.

Toshiba and NEC have close ties in process development. But Toshiba has its own share of problems and losses. NEC would simply compound Toshiba's problems.

In other words, Renesas and NEC have no where to hide and may be forced to merge. But if such a deal goes through, look for massive layoffs and fab closures.

Sorting out the issues
Renesas and NEC also come with their own issues, namely huge losses, lackluster product lines and a lack of focus. The two companies also have too many older fabs and employees.

In 2002, Japan's Hitachi Ltd and Mitsubishi Electric combined their logic chip units to form Renesas. Hit hard by the IC downturn, Renesas in January replaced its top executive amid losses, layoffs and plans to shutter older fabs. It is projected to show a $2.294 billion loss and slumping sales for the year.

The company is also reducing temporary workers. It will also shutter older production lines. By downsizing the production capacity of the 5- and 6-inch front-end process lines, as well as moving to larger wafers, Renesas is aiming to increase manufacturing efficiency.

Over the years, it has been a roller-coaster ride for NEC Electronics and its parent company. In 1999, NEC spun out its DRAM unit. Elpida Memory Inc. was established as a joint DRAM venture between NEC and Hitachi.

In 2002, NEC Electronics separated from its parent, NEC Corp., forming a new and independent semiconductor unit. Seeking to cut costs, NEC Electronics last year announced plans to implement an "enhanced" early retirement program. The company also recently disclosed details of its fab consolidation plan. It continues to shutter older lines.

The moves are part of an ongoing effort to cut costs at the loss-ridden chip maker. In January, parent company NEC Corp. said it will cut 20,000 workers. Amid a loss, NEC's U.S. unit recently said it will close its 6-inch wafer fab line at its manufacturing facility in Roseville, Calif., by the end of March 2010.

Citing the downturn, NEC also posted sales of 127.3 billion yen ($1.4 billion) in the third quarter, down 25.4 percent from the like period a year ago. The company posted a loss of 19.9 billion yen ($219 million) in the quarter, compared to a loss of 936 million yen 9$10.3 million) a year ago.

NEC also cut its sales forecast for the year by 15.9 percent, from to 660 billion yen ($7.3 billion) to 555 billion yen ($6.2 billion). NEC also cut its profit forecast for the year, from a net of 1 billion yen ($11.1 million) to a loss of 55 billion yen ($610 million).

- Mark LaPedus
EE Times

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