Texas Instruments, the world’s sixth biggest chip maker, has watched falling DRAM prices destroy its profit margins for long enough, and has exited the memory chip business, lock, stock and joint venture, passing it all to Micron Technology Inc for approximately $800m in stock and assumed debt. TI will become Micron’s biggest shareholder in the deal, and will inject $1.5bn in loans and debentures to ease Micron’s liquidity burden in swallowing the TI business. On top of this disposal, TI will also cut 3,500 jobs from its 44,000 worldwide workforce as it attempts to align its cost base with its reduced size. In a highly complex deal, Micron has agreed to purchase all of TI’s memory related assets and all of its shares in two DRAM making joint ventures in Singapore and Japan. This will leave TI to concentrate solely on its more lucrative Digital Signal Processing business, which manufactures chips for the communications market. The price paid by Micron comprises 28.9 million shares of Micron stock, worth $656m based on Thursday’s close, and the assumption of $190m of debts that TI has incurred in setting up its Italian memory operations. TI will then hold a 12% stake in Micron (with options to convert debt into a further 4% holding), allowing TI to retain an interest in the memory business as and when memory prices make their anticipated recovery. But the $800m total consideration leaves TI nursing a material but as yet undisclosed loss on the sale. The company said it was too early for the loss to be accurately calculated. Memory prices have fallen by 60% from their 1997 levels, and TI lost $129m from its memory operations last quarter, while just scraping into an $11m profit overall, from $2bn of revenues. Hence the price reflects the transfer of a loss making business. Tucked in as a post script to the deal was TI’s restructuring announcement, which will also brings with it a substantial charge, the timing of which is no coincidence. TI is hurriedly pushing through these restructuring costs in the hope that making a bad quarter worse will be more palatable than ruining successive quarters. Jointly, these actions are intended to save TI $270m a year. For its part, Micron Technology Inc looks to have cut itself an interesting deal, albeit one that gambles heavily on an upswing in memory prices to help pay for the interest on its newly-issued debts. Micron, based in Boise, Idaho, already derives half of its $3.5bn annual revenues from memory products, and following the downturn in business the company has been rated a credit risk by Standard & Poor’s since March, indicating a serious short term liquidity problem. This new deal calls for TI to pump nearly $1.5bn in new loans and debentures into Micron, giving it a huge cushion in this capital- intensive business, and a better chance of riding out the DRAM storm. The increased gearing will weigh heavily on Micron’s profits, but TI’s huge equity stake in Micron will make it less likely than most to pull the plug if Micron defaults on its interest payments. And so while TI is handing over all operational responsibility for its memory business to Micron, the Texan giant still has substantial financial risk linked to this market.
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