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April 26, 2006 5:15 pm

Hsun Chieh share sale boosts UMC profits

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United Microelectronics, the world’s second-largest contract chipmaker, reported a sharp rise in net profit for the first quarter, mostly thanks to the sale of shares in a company controlled by the group’s former boss.

Critics say the company’s sale of 65 per cent of Hsun Chieh Investment Corporation is aimed at ensuring Robert Tsao, the former chairman, will be able to maintain control over UMC. The investment company is also UMC’s biggest shareholder. Mr Tsao and former vice-chairman John Hsuan resigned in January after they were charged with alleged breach of trust, although they remain on the UMC board.

Prosecutors allege the pair used company resources to help set up Hejian, a chip foundry in China, without proper compensation for UMC.

The case is seen as an attempt by Taipei to set a high-profile example in its campaign to prevent Taiwanese businessmen from shifting most of their capital to China – an issue it sees as a threat to security.

UMC originally held more than 99 per cent of Hsun Chieh but the company sold its stake down to 35 per cent in late January. Hsieh Yong Capital, an investment company set up by a number of electronics companies in which UMC holds stakes, bought the shares.

UMC booked T$15.8bn (US$491m) income from the sale. But analysts said the deal’s most important impact was to allow the former management to gain voting rights through Hsun Chieh’s UMC shares. As a wholly owned UMC subsidiary, Hsun Chieh’s holdings in the chipmaker had to be treated as treasury shares, which have no voting rights.

Liu Chi-tung, UMC’s chief financial officer, said by lowering UMC’s holdings in Hsun Chieh, the UMC shares held by the investment company would no longer have to be treated as treasury shares. “Thus the Hsun Chieh stake is more useful,” he said. “Moreover, through selling to Hsieh Yong, we are introducing a new strategic investor. That is positive”. With 3.04 per cent of UMC’s shares, Hsun Chieh remains the company’s single largest shareholder.

Besides helping the former management retain its influence, the selldown also frees UMC from the need to include Hsun Chieh’s activities in its consolidated financial statements.

UMC reported net profits of T$12.29bn in the first quarter, up from T$1.52bn in the same period last year.

Operating profit fell 72 per cent to T$85m. Revenue rose 20 per cent to T$24.4bn.

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