Taiwan Semiconductor Manufacturing on Thursday said it was in talks to buy back a
16 per cent stake from Philips, the Dutch electronics group, and make a subsequent capital reduction.

But the world’s largest made-to-order chipmaker said it did not intend to return cash to shareholders through a pay-out, such as the one announced by its smaller rival UMC earlier this week.

The announcement by Rick Tsai, the chief executive, and Lora Ho, chief financial officer, clarifies TSMC’s intentions on how to improve its cash utilisation as foreign investors push Taiwanese companies to manage their capital more actively.

“This converges quite nicely with our goals,” said Mr Tsai. “We would like to achieve three goals in one stroke: Buying back those shares, reducing the Philips overhang and better utilising our cash.”

Ms Ho said cash reserves sufficient to cover three quarters of operations and capital expenditure for one quarter would be considered reasonable. “We have some excess cash from that perspective and will address that in a reasonable amount of time,” she said.

But analysts said the
capital reorganisation could be complicated by shifts in the chip sector triggered
by the growing participation of private equity firms.

Freescale, the former Motorola chipmaking unit acquired by Carlyle Group in December, announced earlier this week that it would start a research and development alliance with IBM, making its long-term co-operation with TSMC less certain.

The move followed a decision by NXP, the former chipmaking unit of Philips which was bought by a Kohlberg Kravis Roberts-led private equity consortium last September, to bow out of an R&D alliance that Freescale is also part of, and seek closer co-operation with TSMC.

Analysts said the changes gave Philips increased bargaining power in the talks with TSMC. “Philips is trying to make TSMC buy some of NXP’s capacity,” said Eric Chen, head of research at BNP Paribas Securities in Taipei.

Mr Tsai said TSMC was looking into a potential acquisition of factories, but had to consider their cost efficiency, and considered Asia the most efficient location for fabrication plants, or fabs.

TSMC’s capital reorganisation coincides with slowing industry growth, which some observers say is forcing the company to consider non-organic paths of growth.

Mr Tsai predicted on Thursday that world semiconductor industry growth would slow to 4 to 6 per cent this year. He refused to confirm that TSMC would beat industry growth – a pledge the company has routinely made in the past.

TSMC’s net earnings dropped 17.7 per cent year-on-year in the fourth quarter to T$27.91bn ($820m) on a 5.4 per cent drop in net sales.

The company said sales and profit would continue to slide in the three months to March 31 but a recovery would begin in March.

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