March 6, 2009 10:15 am

STMicroelectronics test and packaging unit targeted by Advanced Semiconductor Engineering

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Advanced Semiconductor Engineering [ASE], the listed, Taiwan-headquartered integrated circuit [IC], packaging and test services provider, has expressed interest in the packaging and test unit of STMicroelectronics [STMicro], the Swiss-based chip maker, two industry sources close to ASE told mergermarket.

When asked about the company, an ASE insider said, “We have a close relationship with STMicro as a client”, but refused to comment on whether STMicro is a potential target. ASE, with a market cap of TWD 68bn (USD 2bn), has been in talks with many potential parties, a second ASE insider acknowledged. However, ”nothing is in the pipeline,” he said, in response to the question whether the company is going to ink any deals within this year.

Jeffrey See, who is general manager for StMicro’s packaging and test manufacturing unit, has not been available for comment.

STMicro, among other global chipmakers such as Cambridge Silicon, Conexant Systems, NXP Semiconductors, Freescale Semiconductor, Powerchip Semiconductor and Nvidia, is one of ASE’s 200 customers, according to ASE’s latest annual report.

ASE is currently not working with any external financial advisors and hires firms on a case-by-case basis, the second ASE insider said. Citigroup is one of the company’s general financial advisors, the first industry source said, adding that several senior ASE executives used to work for the bank.

ASE has already been engaged in discussions with STMicro, both industry sources claimed, but were unaware if the talks had progressed to a stage where a deal was being considered. The second source said ASE is particularly interested in the China-based business of a few of its customers, such as STMicro. The cheaper labour in China and the companies’ customers make these businesses attractive targets, the source explained.

A European industry source noted that STMicro was likely to consider offers for its packaging operations. STMicro’s back-end activities in Singapore would be soon transferred to the Shenzhen plant in China. ”STMicro is reviewing the packaging activities. They used to have two plants in Morocco, one of which was recently closed. They might want to concentrate these operations in a single geography and plan a disposal,” he said. He wasn’t aware of any ongoing negotiations but agreed that the company was looking to streamline its balance sheet and would consider M&A opportunities.

An industry analyst agreed that a tie-up between STMicro and ASE would make sense as STMicro is currently refocusing the business and trying to recover its margins following a USD 2bn investment in the wireless arena. STMicro’s margins are the lowest in the semiconductor industry, he noted.

The analyst explained that STMicro’s packaging and testing operations are part of the manufacturing process currently split in two segments: the so-called front-end and back-end activities. The front-end process is capital-intensive and managed in Europe with some operations in Singapore. The back-end stage is labour-intensive and entirely run in low-labour-cost geographies, particularly Malaysia and China. The back-end operation is deemed as ”non critical” as part of it has already been outsourced to ASE and STATS ChipPAC.

However, both Taiwanese industry sources reckoned that ASE might not take action too soon because of the industry overcapacity problem. Thanks to the collapse in the consumer electronics demand as a result of the global economic downturn, ASE’s current capacity utilization, similar to that of many of its competitors, is less than 50%, the first source pointed out. ASE saw its net profits down 49% to TWD 6bn from a year earlier. As of 31 December 2008, the company has TWD 26bn net cash and TWD 9bn debts.

”But the chance [that ASE make buys] couldn’t be ruled out,” the first source argued, ”if it were a very attractive deal value, say, 0.2x-0.3x book value.”

Commenting on the valuation, a Taiwan-based tech analyst agreed that 0.2x-0.3x book value is ”cheap enough to buy”. Citing the current industry benchmark, he said even underperformed chipmakers are trading at around 0.8x-1.0x book.


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