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To: patrick tang who wrote (4062)	10/1/1998 11:52:00 PM
From: DJBEINO	Read Replies (1) \| Respond to of 9582

Trying to make Korea's 'shotgun marriage' work By Jack Robertson SEOUL -- Nothing is tougher to execute well than a corporate merger. Even the best-planned corporate marriages between companies that are seemingly compatible with one another often blow up. So where does that leave the "shotgun marriage" now being forced on Hyundai Electronics Industries Co. and LG Semicon Co. by the South Korean government? The outlook certainly doesn't look good for the new combine, which is expected to generate enough DRAM sales to rank it near the top of the global heap. The strong-willed owners of the two companies have been squabbling for weeks over which one will control the new semiconductor giant. Even if they can agree on who will run the new company, industry observers predict that melding the disparate managements is going to be a rocky affair that's going to take a lot of time. Sorting out the pecking order isn't going to be easy, agreed Ilsuk Han, analyst for ING Barings Securities in Seoul. Concluded International Data Corp.: "Hyundai and LG will have large vested interests in the new company that don't [see] eye to eye. Each [faction] will be fighting for [its] stake and it will take some time to work it all out." But that's just the beginning, because the merged company then will have to merge two wildly divergent approaches to chip design and production processes, and marketing, R&D, and capital investment strategies. LG Semicon scored an early jump on the PC-100 64-megabit fast SDRAM market by improving its existing i-line lithography processes to handle quarter-micron feature sizes. This proved to be a faster way to get to market than was Hyundai's strategy, which was to jump headlong into the next-generation deep-UV steppers. LG's conservative approach was defended by Michael Sporer, technical marketing manager for LG Semicon America in San Jose. "LG manufacturing technology does not require the most advanced lithography processes," he said. "We can build 64-Mbit DRAMs on 0.30 micron processes in the smallest die size [using 0.30-design rules]," Sporer continued. "Indeed, LG has been imminently successful in the market with this approach and is now shipping the largest number of PC-100 64-Mbit SDRAMs in the world, with a 35% market share." Hyundai, in contrast, is committed to deep-UV and DRAM die shrinks to get more and more chips from a wafer, which is the cost-cutting strategy of most other major competitors. Survival in the DRAM industry will depend on successful die shrinks and extending the 248-nanometer wavelength processing down to 0.18-micron feature sizes, according to Kye-Hwan Oh, Hyundai's executive vice president for semiconductors (see story in the June 15 publication). LG currently sells more heavily into the spot market than does Hyundai which concentrates primarily on OEM contracts, analysts said. Each strategy has its own strengths and weaknesses, but the merged chip operation will have to be able to patch up any conflicts between the two in supply channels. Considerable cost-savings could be achieved from the merger by consolidating their massive manufacturing operations, analysts said. This would mean a down-sizing of facilities -- there are now eight Hyundai fabs and seven LG semiconductor plants - and their staffs. But most observers expect both sides to fight vigorously to prevent any paring of their operations. One approach, however, that might work would be to close three aging 5-inch and 6-inch Hyundai fabs and two 6-inch LG fabs. Analysts believed that the two chip makers were already planning before the merger came up to get rid of these plants in the near future. Another potential battleground is in the United Kingdom. What will happen to Hyundai's postponed Scotland plant and LG's Wales fab that also is on hold? And which fab would get the green light if the new combine decided later on to expand in Britain? Another problem coming out of the merger is that each chip maker uses a different tool set in its fabs. That has to be harmonized, observers said, if the merged operation is to achieve efficient production economies of scale. In the critical area of steppers, Hyundai has standardized on ASM Lithography's deep-UV tools, while LG predominately uses Canon Inc. i-line systems. Micron Technology Inc., which is facing the same kind of a problem in its deal to acquire the DRAM business of Texas Instruments Inc., will replace TI's Canon steppers with ASML equipment, its stepper of choice. Micron, however, has the benefit of using deeply-discounted TI financing in the upgrade. By contrast, any Hyundai-LG chip combine will start out cash-short. Perhaps the biggest challenge the new Korean chip enterprise will face is to cope with the mountains of debt that it is likely to inherit from the parent companies. LG presently carries a debt load of more than $5 billion, which is almost all related to semiconductors, and has a 5-to-1 debt-to-equity ratio. Hyundai is carrying $8 billion in debt, which represents a whopping 9.3 debt-to-equity ratio. Its debt load also relates to telecom and computer operations. Analysts said that both companies are asking for some kind of financial bailout from the government as the price for merging their chip operations. ING Barings' Han said the two chip firms were asking the Korean government and banks to convert much of their debt into equity in the new company. That could put the new combine in a lot better position to finance R&D and capital spending, he said. That kind of deal might help to get the new semiconductor company out of its financial quagmire, but would be certain to unleash a strong protest from the U.S. chip industry. The U.S. Semiconductor Industry Association, as well as Micron president Steve Appleton, has pledged to fight any further Korean government bailouts of the chip chaebols. The Korean chip merger also would give the U.S. Commerce Department a headache when it tries to levy new DRAM dumping duties, which in August set different amounts for each firm -- 9.28% penalty tariffs for LG Semicon and 3.9% for Hyundai. There is little or no precedent for adjusting such dumping penalties. The merged firm could escape much of these penalty duties by selling DRAMs in the U.S. made at Hyundai's new fab in Eugene, Ore. These chips would be exempt from the dumping tariff, which could motivate the new Korean chip combine to produce as many DRAMs as possible in Oregon for the U.S. market. semibiznews.com