Duker/all, Philips wants to buy VLSI. Here's the story. Jeff
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Top Financial News
Fri, 26 Feb 1999, 1:04pm EST
Philips Electronics Offers to Buy VLSI Technology for US$777 Mln in Cash
Philips Electronics Offers to Buy VLSI for $777 Mln (Update5)
(Adds comments from VLSI chief executive, details.)
Amsterdam, Feb. 26 (Bloomberg) -- Royal Philips Electronics
NV, Europe's No. 1 semiconductor maker, offered to buy U.S.
chipmaker VLSI Technology Inc. for $777 million, hoping to gain a
broader range of chips for its electronic consumer products.
Philips said it offered $17 in cash per VLSI share, a 58
percent premium over yesterday's closing price. VLSI officials
said they would review the offer and declined to comment further.
The company's shares rose 4 5/16 to 15 1/16 in midday trading.
VLSI, based in San Jose, California, would give Philips
access to a range of technologies to improve its mobile phones,
portable computers and new digital electronics products.
Amsterdam-based Philips could use VLSI's chips to jump-start its
unprofitable mobile-phone business after its failed PCC joint
venture with Lucent Technologies Inc., analysts said.
''It's quite good timing and quite a good buy,'' said Nils
Meyles, an analyst at Friesland Bank Securities who rates Philips
a ''market performer.'' ''It may help them refocus and make the
PCC group profitable again.''
VLSI's biggest attraction is its strength in chips with code-
division multiple access, or CDMA, technology, a standard for
U.S. mobile phones, Meyles said. That would help Philips secure
U.S. market share that's essential for its survival as a phone
maker. It needs to grab more of the $44 billion world market for
mobile phones now dominated by Nokia Oyj, Motorola Inc. and
Ericsson AB.
Philips's offer was spelled out in a letter to VLSI
following meetings between the two companies. Philips is asking
for a response by Wednesday, and declined to comment on what it
would do if VLSI rejects the offer.
VLSI Chairman and Chief Executive Al Stein said the company
had received the offer letter from Philips, though he declined to
say when VLSI's directors will meet or whether he expects the
board to accept it.
''We've looked at it,'' Stein said. ''We'll review it with
our board of directors and respond appropriately.''
Chips for Communications
Ericsson was VLSI's top customer in 1997, bringing in 29
percent of revenue, and Philips's former partner Lucent was
another. Once a pioneer in developing high-margin specialized
chips for computers, VLSI now focuses on communications chips,
and makes custom chips used in televisions and set-top boxes -- a
complement to Philips' expansion in multimedia electronics
products for consumers.
The purchase also may be a move to beef up the semiconductor
division prior to selling it off, analysts said. Germany's
Siemens AG, the world's No. 10 chipmaker, plans to sell shares in
its semiconductor unit early next year after it revamps the
business to make it profitable again.
The bid for VLSI is well-timed to help Philips take
advantage of a rebound in the chip industry that's expected in
the second half of this year, analysts said. Philips' chip unit
head Arthur van der Poel said last month that he expects the
world market for chips to grow between five and 10 percent this
year.
Philips squeezed out 2 percent growth in 1998 sales to 7.1
billion guilders, beating out other chipmakers that saw sales
fall. Philips benefits from its absence in the market for memory
chips, where prices fell as much as 60 percent last year.
Chip Ranking
Philips climbed one notch in 1998 to rank eighth among the
world's chipmakers, according to market researcher Dataquest.
Adding about $550 million in sales, the purchase of VLSI may not
be enough to leapfrog No. 7 Hitachi Ltd. of Japan, though it may
be a sign Philips will buy again in chips, analysts said.
''Semiconductors are the most obvious acquisition area,
especially chips for multimedia applications,'' said Bert
Siebrand, an analyst at SNS Securities, who rates Philips a
''hold.''
Philips is loaded with cash from the sale of music company
PolyGram NV to Seagram Co. of Canada. The VLSI purchase still
leaves it with more than $5 billion to spend on a second share
buyback and more acquisitions.
Philips also is eager to trim its dependence on the European
market, where economic growth is expected to slow this year. It
boosted its U.S. marketing budget for 1999 by 30 percent over
1998 as it pushes the Philips brand name.
''We plan to use VLSI as a cornerstone of our growth
strategy for Philips Semiconductors in North America and as a
platform for further expansion,'' Chief Executive Cor Boonstra
said in his letter to VLSI's Stein.
Philips expects double-digit growth in 1999 earnings this
year. The bulk of the increase will come in the second half, as
Philips said first-half profit will likely decline from the same
period in 1997.
Philips' last move to strengthen its chip division was its
$1.2 billion investment in a new plant in Singapore with two
partners. That plant will start making tiny ''logic'' chips, used
in televisions and mobile phones, next year.
The company indicated on Feb. 11 that fourth-quarter profit
from operations fell 19 percent to 889 million guilders ($445
million), hurt by economic slowdown in Asia and Brazil as well as
slower sales of its products in the U.S.
At VLSI, profit from operations fell 33 percent to $14.8
million, or 32 cents a share, in the fourth quarter. The company
plans to reduce its workforce by 10 percent by 2000 through
cutbacks and attrition.
Philips shares fell 0.25 euro to 63.50 in Amsterdam. The
company's U.S.-traded shares fell 5/16 to 69 13/16.
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