(Nikkei BP Group)
(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
|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
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)