Semiconductor Business News, © 1998, CMP Media Inc.
December 1998
Korean chip merger moves ahead
'Shotgun wedding' of LG and Hyundai businesses set for Dec. 31 after
government puts on pressure
By Jack Robertson
SEOUL -- For a while it didn't look as if it would happen, but the deal that would
create the world's third largest DRAM producer is beginning to come together.
Dec. 31 had been set as the date for the "shotgun wedding" of the chip
operations of South Korea's LG Semicon Co. Ltd. and Hyundai Electronics
Industries Co. Ltd.
The merger, which is being forced on the two chaebols by the South Korean
government, is part of its plan to recast the country's top five industrial groups,
which includes slashing the number of their subsidiaries from 264 to 130.
After months of squabbling over which one of the bitter rivals will control the
new DRAM giant, the two companies have now promised the government they
will settle the issue of who will run the merged company by Dec. 25.
Arthur D. Little Inc., the Cambridge, Mass., management consultant hired to
work on the deal, has been told by the government to report its merger guidelines
by Dec. 22, which would include its recommendation on which company would
run the new combine. Then Hyundai and LG Semicon will have nine days to sign
a final agreement based on that recommendation.
The two companies now have very little wiggle room left to keep balking at
combining their chip operations. If they fail to sort out the management control
issue, the companies could see their loans called in and their credit frozen.
The Financial Supervisory Commission, which is overseeing the chaebol
restructuring, has warned the two companies that if they don't merge their chip
operations they could be thrown into a creditors' "workout" negotiation, which is
akin to U.S. pre-bankruptcy proceedings. A Hyundai spokesman acknowledged
that "the situation is very sensitive and the stakes are very high."
Even if Hyundai and LG Semicon merge, it is far from clear how well the bitter
rivals can mesh their chip operations into one. Each has sharply divergent
business strategies, marketing and distribution setups, and production
technologies. An official of Micron Technology Inc. hopes there is a merger,
"because there will be so much trouble, it could end up setting them back."
One of the biggest stumbling blocks in coming up with a merger package has
been how to handle the huge debt load that the two chip manufacturers are now
carrying. LG Semicon has a debt-to-equity ratio of more than 5-to-1 and Hyundai
Electronics was running a 7-to-1 ratio, according to estimates by analysts. (The
Hyundai ratio also covers its telecommunications equipment business.) But now
both chip operations reportedly have agreed to cut their debt-to-equity ratios to
2-to-1 by the end of 1999.
One of the toughest jobs ahead for the new chip company will be to come up
with the money to finance the high levels of R&D and capital investment that it
needs to remain competitive in the global semiconductor markets. This year,
Hyundai and LG Semicon both cut their capital spending by up two-thirds to
about $600-to-$700 million each.
Fab consolidation could lower the need for capital spending, but the new
semiconductor company can't cut too much leading-edge wafer fab capacity if it
is to retain the economies of scale that would keep it competitive with Micron
and Samsung, the other two leading DRAM suppliers.
Hyundai currently has four 8-inch fabs in Korea that are being upgraded to
sub-quarter-micron processing, and an 8-inch 0.22-micron fab in Eugene, Ore.
LG Semicon operates five 8-inch fabs in South Korea, and has started converting
some of them to sub-quarter micron processing.
Both companies have unfinished superfabs on hold in the U.K. Hyundai is
building one in Scotland and LG Semicon has one in Wales. It was unclear
whether construction on either of these plants would resume after the merger.
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