Describing the proposed merger of LG Semicon into Hyundai Electronics Industries as a hostile takeover would be to considerably understate what is turning into a three-sided war.
It is still by no means certain that the deal will go through, despite the apparent capitulation by LG Group in early January and its agreement to let Hyundai purchase all its shares in LG Semicon. The longer the fighting continues, the more damage is being done to South Korea’s semiconductor industry. By the time negotiations stagger to a conclusion, the prospects of the new industry giant being able to compete as effectively on the world stage as had originally been envisaged look likely to diminish.
As the end of January approached, the exasperated Industry, Energy and Commerce Minister, Park Tae-young, summoned Kim Young- hwan, president of Hyundai Electronics, and Koo Bon-joon, president of LG Semicon, to his office to try and pressurize them into settlement. He wasn’t able to.
Had a friendly merger take place by the end of last year as initially suggested, with one company assuming management control and a 70% share of the new entity, the result would have been the creation of the world’s largest 64 MB DRAM maker in volume terms by far, with each party bringing in new proprietary technologies for different segments of the memory market and ready to capitalize on the expected continued international turn-up. Both companies say there is little overlapping of facilities.
Hyundai, for example, has taken a lead in the development of rambus DRAMs and has produced a prototype of the world’s smallest 72MB RDRAM. It will start mass production in the second quarter 1999 with 144MB RDAMs going into production in the third quarter and 256MB samples coming out by the end of the year. It expects sales of the new chip to be worth $400m this year, only a small percentage of turnover, but rapidly increasing thereafter.
Late last year, LG Semicon announced it had completed development of a fifth-generation 64MB DRAM chip and was gearing up to go into production this month – beating its major competitors, none of whom will be in mass production before the second half of the year. By then, LG had been expecting to be turning out more fifth-generation DRAMs than any other product.
However, both of LG’s Korean factories are now standing idle. Around 7,000 of the company’s nearly 10,000 workers are marching through the streets of Seoul demanding either the merger be called off, or for their not inconsiderable demands to be met if it does go ahead. The strike and protest are aimed both at LG management, who the workers accuse of not having their interests at heart, and at HEI for refusing to meet LG’s demands of written guarantees of jobs for all LG Semicon employees for five to seven years. If these are not forthcoming then the LG workers say they will resign but demand compensation of 60 months’ pay.
Korean analysts estimate the stoppage is costing LG Semicon $12.8m a day, adding to its already shaky financial position which was one of the main reasons for the government insisting on the merger in the first place. The combined debts of LG Semicon and HEI are estimated as being anything up to $10bn depending on who is doing the analysis and which yardstick they are using.
But as well as the ongoing cost, it could be losing LG customers in the long-term. IBM Korea has reportedly embarked on finding alternatives to LG for semiconductors and to Daewoo, whose workers are also on strike in protest at another forced merger, for monitors. Most multinational enterprises manufacturing computer hardware products have been affected by the recent workouts. The continuation of the strikes will result in a drop in Korea’s overseas credit, an IBM official told the Korea Times.
Even if the workers can be appeased and persuaded to return to the production lines, there is still the question of cost to be worked out with LG insisting on up to six trillion won (approximately $5.4bn) while Hyundai says its very top limit is only half that. LG wants to be paid in cash, while Hyundai is proposing handing over some non-memory assets and convertible bonds.
Once negotiations with LG are concluded, if they ever are, HEI will then be faced with deciding which plants will continue and what they will be producing. However, with 64MB DRAMs being the most important product at the moment production is expected to be maintained as close to capacity as possible in newer 8-inch wafer fabs. By the end of last year Samsung and LG had each boosted production of 64MB DRAMS to 15 million a month as compared to Samsung’s 17 million. US manufacturer Micron produces up to 20 million. So, its combined capacity would be 50% more than the nearest competitor. Outdated 5-inch fabs could be shut down or possibly converted to foundry operations.
When 256MB DRAMs start to replace lower-end DRAMs as industry standard, probably in 2000, a merged company would almost certainly be a major international player with each having already invested heavily in R&D for the next generation of chips. Along with Samsung, Micron and NEC the HEI/LG combination would be one of the few companies able to make the necessary huge investment in 12-inch wafers, and to make the next leap to 1GB DRAMs perhaps two years later.
Further strengthening the Korean company’s position is an unprecedented deal HEI has just signed with NEC under which the two agree to the free use of each other’s technologies. This agreement followed a year-long feud over patent rights and a US court case in which HEI came out on top. The agreement will help the two firms enhance technical cooperation in the competitive chip market. We have agreed to share technologies on both memory and non-memory chips, an HEI official said.
But according to one Japanese paper there is a downside to this deal as Hitachi has allegedly decided to discontinue technology ties with LG Semicon if the merger with HEI goes ahead, in order to avoid providing its technology to Hyundai and presumably via Hyundai to NEC. LG Semicon supplied $320m worth of DRAM chips to the Japanese company last year, amounting to about 15% of its total production.
Outside Korea there are also important considerations, particularly the chip production plants that HEI is building in Scotland and LG Semicon is building in Wales. Both projects were put on hold in a semi-completed state at the end of 1997 due to financial problems and the market downturn.
A recent report in the Korean press said HEI is looking at selling the Welsh facility, which would cost a total of $2.7bn when fitted out, to Samsung Electronics which does not have a semiconductor manufacturing facility in Europe. A Samsung official said it may consider buying the plant if the price is right, but not in the immediate future.
However LG may well have different ideas on this, and one report claims it does not intend to turn the plant over as part of the deal and is negotiating with parties in Singapore to turn the plant into a facility for TFT-LCD displays. Late last year it stripped its LCD manufacturing business out of LG Semicon and combined it with sister company LG Electronics’ LCD business in a new venture.
There is little doubt in anybody’s mind that a merged HEI/LG Semicon would be one of a small handful of top companies dominating international chip markets in the new century, but the more the two fight with each other and with the LG workforce the less potent the resultant merger will be and the longer it will need to recover from the damage now being done.
