Royal Philips Electronics NV has made public an audacious $776.8m bid for VLSI Technology Inc in an attempt to get shareholders to lean on the board to accept the deal. Pouncing when the San Jose, California chipmaker VLSI has just reported a weak year in a semiconductor industry just coming out of recession, Philips is offering $17 in cash for VLSI shares which stood at $10.75 before the offer was announced. Merger talks have taken place between the two companies and the VLSI board was clearly unimpressed. So Philips president and CEO Cor Boonstra made public a letter to VLSI’s president and CEO Alfred Stein making the offer to the company and giving the board a deadline of March 3 to respond. This is a risky strategy, putting VLSI into play and inviting competing bids. IBM Corp, Texas Instruments Inc or STMicroelectronics NV might all be interested in the company. VLSI has struggled of late and net profits for the year to December 25 were down 70.8% at $20.9m on revenues that fell 23.1% to $547.8m (CI No 3,581). While VLSI has moved away from the PC market, it was unable to escape the general decline in semiconductor prices, though it has heavy involvement in chips for mobile handsets and its biggest customer is LM Ericsson AB. It is this involvement in wireless components and its application-specific chip technology that has brought Philips knocking on VLSI’s door. In his letter, Boonstra says that the combined business of VLSI and Philips could be a global leader in many of the most exciting semiconductor markets. Philips says there is little overlap in product range and it plans to use VLSI as a cornerstone of our growth strategy for Philips Semiconductors in North America and as a platform for further expansion. However, there are huge question marks over the ability of Philips’ management, and it has just reported a pitiful year when underlying profits from continuing operations plunged 56% on revenues that rose only 2.6% to $34.4bn. Boonstra’s own position as CEO has been questioned, so he needs bold acquisitions such as VLSI to convince critics he has the ability to move the company forward. Philips has a dismal recent record in the US having run up $940m losses on its 60/40 association with Lucent Technologies Inc in fixed and mobile equipment, which was dissolved in September 1998. VLSI shares have been as high as $25.50 in the past year and the board has grounds to feel that Philip’s intervention will attract a larger bid from a more impressive partner. VLSI, which was preparing a statement on the bid as we went to press Friday, saw its shares rise $4.75 to close at $15.50 on the news.
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