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(No.1 High-Tech News Site in Japanese)

  • Rough Road Ahead for Merger of Korea Semiconductor Giants
  • September 10, 1998 (SEOUL) -- Korea's two debt-ridden semiconductor makers agreed to a merger, but their future remains uncertain, with many questions unanswered.
    In the historic agreement announced on Sept. 3 by the Federation of Korean Industries (FKI), the collective voice of Korea's business conglomerates known as chaebol, Hyundai Electronics Industries Co., Ltd. and LG Semicon Co., Ltd. are to combine their chip-making units into a single company some time in the future. The deal is part of the wholesale business swaps being made among the top five chaebol.

    The agreement came after months of wrangling between the Korean government and the group of still-powerful chaebol over what had to be included in so-called "big deals," seen as the only viable solution to the current crisis in Korean industry, which is suffering from massive overcapacity and immense debt burdens.

    The semiconductor sector has been one of the stickiest points in the big deals because of huge stakes. Chip exports account for more than one fifth of Korea's total exports. The three Korean chip makers including Samsung Electronics Co., Ltd. has many billions of dollars tied in their projects here and abroad.

    "The domestic companies will be able to secure the undisputed global leadership by combining the world's third- and sixth-largest makers into the second-largest (after Samsung Electronics) and improve profitability by facilitating supply adjustments," the FKI said.

    Based on 1997 sales, Hyundai Electronics held a 9 percent world market share, while LG Semicon had 6.7 percent. Their combined share will put the new company in the second spot ahead of NEC Corp. of Japan. Add Samsung Electronics, and Korean companies control more than one third of the world market.

    Analysts said the proposed Hyundai-LG merger makes sense in terms of the economy-of-scale and the fusion of their existing know-how. "The integration of the Hyundai and LG semiconductor units is an ideal marriage between Hyundai's strength in research and development and LG's in manufacturing," said Chu Dae-young, research director at the Korea Institute for Industrial Economics and Trade.

    However, no one seems to be smiling. Their arms twisted by a government desperate to reform the country's weakening corporate sector and equally troubled financial system, the two companies are not exactly happy about their forced marriage.

    The LG Group is afraid that the deal may clip one of the wings of its flagship electronics business supported by LG Electronic Inc and LG Semicon. Hyundai is reportedly pushing for a 70 to 30 equity make-up in its favor, citing the bigger size and market share of its semiconductor unit.

    A more troubling aspect of the Hyundai-LG merger is their enormous financial problems, and no easy way out of them. The two firms' combined debts are estimated at 16 trillion won (about US$12 billion). They have seen no profit for this year, and last with their combined net half-year loss was 580 billion won, compared with Samsung Electronics' 150 billion won net profit.

    They hope they can find some white knights -- foreign investors with deep pockets -- but this prospect looks extremely limited by the deepening slump of the global semiconductor industry. An increasing number of foreign chip makers have begun giving up their stakes in the industry, including Siemens AG, Hitachi Ltd., Fujitsu Ltd. and Motorola Inc.

    The three Korean firms also had to stop their fabrication lines several times already to reduce their output in the hope of shoring up collapsing chip prices. Negotiations over Intel Corp.'s US$1 billion investment in LG Semicon appear to have broken down.

    Another stumbling block is how to find a middle ground between Hyundai and LG's heterogeneous business portfolios including TFT-LCDs (thin-film transistor liquid-crystal displays), which also suffer from excess capacity and falling profitability.

    If that is not enough, workers in these companies are increasingly agitated about their own future. Koo Bon-moo, chairman of the LG Group, had to send out personal e-mail pleas for calm to LG Semicon employees after the deal was announced.

    Altogether, the odds are great against the merger between Hyundai Electronics and LG Semicon, and its success, if it ever takes place, will be nothing short of a miracle by Korean standards, experts said.

    Related story: Korea's Top Groups to Reorganize; Hyundai, LG to Merge IC Units

    (James Lim, Asia BizTech Correspondent)

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    Nikkei BP BizTech, Inc.
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    Updated: Wed Sep 9 18:24:10 1998 PDT