Micron Technology Inc. will never be the same. With its recent purchase of Texas Instruments Inc.'s DRAM operations, Micron's self-contained Boise, Idaho, chip community has been catapulted into a global chip enterprise spanning four widely divergent business cultures.
Resources that before could be tightly concentrated in the home base must now be stretched to metamorphize TI fabs in the United States and in Italy, Japan, and Singapore. Executive time that used to entail walking down a corridor must now entail prolonged foreign stays. Disparate Micron and TI operations-ranging from supply chains to customer bases-must be married with as little friction as possible.
This is the nearly unanimous assessment of industry and financial observers who are watching one of the biggest DRAM mergers unfold.
"This is no slam-dunk for Micron," said analyst George Burns of Strategic Marketing Associates, Soquel, Calif. "They must break out of their mold and overcome myriad challenges to pull this off."
On the plus side, Micron, in one fell swoop, is bolting into the top echelon of DRAM players. In fact, the deal will put Micron in the No. 2 spot on the DRAM leader board, behind only Samsung Electronics Co. Ltd., according to Semico Research Corp., Phoenix.
The upgrade of each TI fab to equal Micron's own prodigious chip output from each of its Boise production lines will also bolster the acquisition.
"The timing of the deal couldn't be better for Micron," Burns said. "The conversion of the TI fabs to very high-yield output should be completed sometime in mid-1999-at the very time the global DRAM market is predicted to turn up. [Micron] could be sitting pretty if they can make the transition successfully."
A Micron ready to produce high volumes of inexpensive DRAM could benefit OEMs, especially if the market supply grows tighter late next year, as predicted. The combined Micron and TI operations could spur competitors to ramp up their own volumes to get lower-priced DRAM-also a plus for OEM buyers.
The higher output from former TI fabs could help Micron, already credited with being the industry's lowest-cost producer, to eke out profits in a tough marketplace. With DRAMs still expected to have tight margins for some time, that could help the bottom line considerably.
Steven R. Appleton, Micron Technology's chairman, president, and chief executive, noted when the deal was signed that the company's overhead, R&D, capital spending, and other costs are now spread over a much larger sales base. That cuts Micron's cost per chip much further. In turn, the U.S. DRAM maker becomes more competitive against even its largest rivals, which are perhaps burdened with a higher cost per chip.
Initially, however, analysts expect Micron's nonrecurring costs to go up as it tries to absorb and reshape the newly acquired TI fabs. How the company manages the merger's increased cost burden is critical: Micron is now struggling to return to profitability, and investors will be looking for a predictable payoff from the acquisition, not a string of further losses.
One part of the deal certainly helps: Micron gets $750 million in deeply discounted financing from TI to use in upgrading the acquired fabs and even Micron's own Boise facilities.
"This was one of the most attractive parts of the agreement," Appleton said. "It helps give us a very low cost of capital to be highly competitive against many other DRAM producers who now face a capital funding crunch."
The deal will also boost Micron's fledgling flash business. Appleton said TI's flash expertise could help Micron expand its flash-chip sales into the wireless-phone market and other non-PC applications.
Major challenges that Micron faces in melding the TI operations include:
- The stem-to-stern conversion of the TI fabs in Italy, Japan, and Singapore involves a complete production transplant. No DRAM maker has ever attempted such a switch on this scale.
Micron intends in the former TI fabs to mirror its own low-cost production lines, involving a huge array of new equipment and fewer fabrication steps. Sources believe this will cause the TI fabs to be shut down totally or partially during the transition.
The older production lines in Italy and Singapore will shut down temporarily during the upgrade process, Appleton said in a recent conference call with financial analysts. The 8-in.-wafer lines at all three TI fabs "will be converted on the fly" without closing down, he said.
He expects the fab conversions to take nine to 12 months to complete. "Then they will be at the same 0.21- to 0.18-micron processes as our Boise fabs, and will ramp production as fast as possible," Appleton said.
Sources said the loss of DRAM output from the TI fabs during the transition won't hurt Micron. The TI fabs were mostly making 16-Mbit DRAMs, which Micron is phasing out anyway.
The TI fab conversions involve an extensive equipment change to deep-ultraviolet 0.25-micron processes that Micron uses in its Boise fabs. The company made that conversion in its own fabs without great trauma. Whether making the radical switch in overseas fabs will be a greater problem remains to be seen.
Micron will be working for the first time with different infrastructures on two continents to support and service the revamped fabs. Rival multinational DRAM makers have had many years to learn how to deal with global support. Micron must adapt instantly.
- The "America First" DRAM maker suddenly is cast as a global player, a role it must learn if the merger of the TI fabs is to be successful.
The addition to Micron's board of Pat Weber, former senior vice president of TI, could help. Not only does Weber know the TI fabs from the inside, but he has played a major role in global affairs at TI and the Semiconductor Industry Association. Weber and Appleton worked well together on SIA negotiating teams, especially in the tough sessions leading to the third U.S.-Japan Semiconductor Agreement in 1996.
Micron might soften its feisty stance on some international issues. It will hardly behoove the Idaho chip company to rail against large government assistance to chip makers, when it will now benefit mightily from the big Italian government subsidies to the former TI fab in Avezzano, Italy.
Micron, which battled the European Electronic Components Manufacturers Association over former high European Union chip tariffs, will become a member of the association, if it elects to, through the Avezzano connection.
And even before picking up the fab involved in the former TI joint venture with Kobe Steel, Micron had taken a small step to crack the Japanese market by beginning to sell DRAM modules in Japan through its Micron Electronics PC subsidiary.
Because of Micron's often-aggressive stance on trade issues, the company has gotten a cool reception to its DRAMs in Japan, and the acquisition of the Kobe fab probably won't do much for DRAM sales there. Even under TI, most of the Kobe DRAMs were exported.
- Trying to manage a global production base might create a larger bureaucracy than the tightly run company is accustomed to. Already Micron top executives are spending long hours in Italy, Japan, and Singapore trying to come up with a new multinational game plan. Many believe it's inevitable that Micron will be forced to add more layers of management to control its new global empire.
One common strength that Micron shares with its newly acquired foreign fabs is the loyalty of its workforce. Unlike the rapid job-hopping that Silicon Valley is known for, the more isolated Idaho chip maker has been able to count on workers and executives often spending their entire careers on the Boise campus.
- The biggest mystery after the TI fabs have been meshed into Micron operations is what will happen to the company's once-vaunted Lehi, Utah, fab, which is now a campus of empty building shells sitting in the desert.
Appleton said Micron plans to complete the Lehi project when the time is right. Sources said a few chip companies have had their eyes on Lehi, hoping perhaps to acquire the ready-to-equip complex themselves if Micron no longer needs it. But most believe Micron wants to hang onto the Lehi campus-to be ready to jump quickly when the global DRAM market turns around.
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