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Technology Stocks : WDC/Sandisk Corporation -- Ignore unavailable to you. Want to Upgrade?

To: Jerome Wittamer who wrote (1701)	11/21/1997 12:00:00 PM
From: Mike Winn	Read Replies (2) \| Respond to of 60323

Jerome, Rex, and everybody else, I found this interesting article from the H&Q site. Could someone give some interpretation about what it means and what financial benefit in term of equity can Sandisk receive by investing in UMC? Just as a reminder, Sandisk has invested 45 million in the UMC foundry in Taiwan: sandisk.com. Sandisk has a 10% equity stake in the joint venture. The H&Q article follows: ====================================== Equity Stakes in UMC Joint Ventures are Enormous Hidden Assets for the Value Investor July 14, 1997 (8 pp.) Robert C. Chaplinsky Many semiconductor companies subcontract their integrated circuit (IC) manufacturing to independent foundries to avoid the significant capital investment required for wafer fabrication facilities -- they do not own their "fabs." Companies that own fabrication facilities and manufacture semiconductor ICs, or wafers, for fabless semiconductor companies are called foundries. Two of the largest foundries in the world are Taiwan Semiconductor Manufacturing Company Ltd. (TSMC) and United Microelectronics Corporation (UMC). Both companies have production facilities in Taiwan and are publicly traded on the Taiwan Stock Exchange. The business models of TSMC and UMC are quite different. The TSMC model is based on contractual agreements in which a fabless semiconductor company secures wafer capacity by either negotiating a wafer purchase agreement up front and paying a fixed amount which guarantees a certain amount of capacity, or engaging in an option for the right to future foundry capacity. >>>>>> In either case, the fabless company is protected from rising wafer prices for the duration of the contract -- typically six months to a few years. <<<<<<<<<<< UMC, however, constructs joint venture (JV) agreements in which fabless semiconductor companies commit to invest a certain amount of funds for an equity ownership in the development of a new fabrication facility. Each joint venture functions as a separate legal entity. In this arrangement, both the foundry (UMC) and its partners (fabless companies) share in the financial performance of the JV's operations. To date, three joint ventures have been established between UMC and various fabless semiconductor companies: >>>>>>>>>>>> United Semiconductor Company (USC or JVI), United Integrated Circuit Co. (UICC or JII), and United Silicon Inc. (USI or JVIII). This joint venture model not only guarantees the fabless company needed capacity, but also offers an equity position in the entity, an investment that now appears to be extremely profitable. <<<<<<<<<<<<< We believe there is enormous hidden asset value in fabless semiconductor companies that own equity positions in any of the three UMC joint venture facilities. Although we believe investors typically reward fabless semiconductor companies based on their future earnings stream and not on their hidden assets, in our opinion these assets should be considered because at some time in the future (1998) they will become liquid and will offer enormous cash potential which may be used to fund expansion and/or share buy back. Although it is difficult to determine the fair market value of these equity positions today because they are illiquid, our analysis shows the value of the equity ownership in USC and USI for Alliance >>>> is worth between $10.00 and $21.00 <<<<< -- at worst, a value greater than what the stock is trading at today. Therefore, we are upgrading our rating on Alliance to a BUY from a Hold based on valuation. In addition, we believe that even under a conservative valuation method, the respective equity positions of ESS Technology, Oak Technology, S3, Trident Microsystems, and Xilinx in the UMC joint ventures are significant and have not been reflected in these companies' stock prices. Therefore, we are reiterating our BUY rating on the shares of ESST, OAKT, SIII, TRID, and XLNX.