When South Korean chipmaker Hyundai Electronics Industries Co absorbs its affiliate this week, it will be reborn as the world's biggest DRAM maker, with a huge debt to go along with that status.
Hyundai Electronics will have more than a 20 percent share of the world dynamic random access memory market tomorrow after it absorbs Hyundai Microelectronics Co, which it acquired from LG Group earlier this year.
In terms of market share, Hyundai will outpace Samsung Electronics Co and Micron Technology Inc, which took 18.5 percent and 11.7 percent respectively of global DRAM sales last year, according to Dataquest, which provides market intelligence on the industry.
The integrated Hyundai firm will likely try to sell shares or some of its non-core divisions to slash debt. But cutting debt may become a condition -- rather than the aim -- of any capital-raising exercise, analysts said.
The absorption would help Hyundai save more than US$1 billion per year in research and development and marketing costs while improving productivity, analysts said.
"Bigger scale means smaller production costs, and I think Hyundai will be able to save some money in R&D cost and others by absorbing Hyundai Microelectronics," said Jon Chong-hwa, an analyst at Salomon Smith Barney KEB Securities.
A Hyundai executive also said recently the integration would help bring down the company's production cost.
"A key merger benefit to customers is that it gives Hyundai larger capacity and, therefore, a potentially lower manufacturing cost base," Mark Ellsberry, a Hyundai Electronics America vice president, told the Electronic News magazine.
But the integration would also add to Hyundai's high debt burden. The cost of servicing that debt is already more than wiping out the company's operating income, analysts said.
"Hyundai will have interest-bearing debt of some 11.8 trillion won (US$9.8 billion) and will have to sell off much of its assets to pay back debt," said Jon.
ABN AMRO Securities analyst Chung Myung-sun said the debt repayment burden would add pressure on Hyundai, which will also have to spend money on renovating some of Hyundai Microelectronics' production facilities.
In 1998, Hyundai Electronics posted 23.77 billion won of operating profit but paid 999.54 billion won in interest payments. Hyundai Microelectronics paid 586.49 billion won in interest against 186.9 billion won of operating profit.
Other than semiconductors, Hyundai Electronics also makes telecommunications equipment and devices, thin-film transistor liquid crystal display (TFT-LCD) panels and computer monitors.
After the integration, Hyundai Electronics is expected to sell or spin off most of its business lines other than semiconductors, company officials and analysts said.
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