AU Optronics deal shifts market

AU Optronics Corp's (友達光電) surprising acquisition of smaller player Quanta Display Inc (廣輝電子) last Friday will create upheaval in the global liquid-crystal-display (LCD) landscape, analysts said yesterday.

Over the past two quarters, AU Optronics, the world's No. 3 maker of LCD panels for computers and televisions, has outpaced South Korean competitors LG.Philips LCD Co and Samsung Electronics Co in terms of profitability, but has lagged behind the two big players in terms of market share.

Through the proposed merger, an approach commonly used by companies to rapidly boost market position, AU Optronics will be able to compete with major rivals head on, breaking the South Korean companies' dominance of the global LCD industry.

Closing the gap

"The merger will narrow the 7 or 8 percent gap between us," AU Optronics president Chen Hsuen-pin (陳炫彬), who will also serve as president of the new entity, told reporters on Friday.

At the press conference, AU Optronics said it would take over Quanta Display through a share swap. Each AU Optronics share would be exchanged for 3.5 Quanta Display shares. The transaction is scheduled to take effect on Oct. 1.

AU Optronics had said it was open to merger talks, but the announcement shocked industry watchers and the company's rivals, amid speculation that Quanta Display was in talks with the nation's No. 3 flat-panel supplier Chunghwa Picture Tubes Ltd (中華映管).

The acquisition of Quanta Display will boost AU Optronics' market share to around 19 percent, compared with LG Philips' 22 percent and Samsung's 20 percent in terms of output, according to a tally by Taipei-based Yuanta Core Pacific Securities Corp (元大京華證券).

"We are open to further acquisitions," AU Optronics chairman Lee Kun-yao (李焜耀) said on Friday.

Five years ago Lee masterminded the merger of Acer Display Technology Inc and Unipac Optoelectronics Corp (聯友光電) to create AU Optronics.

"AU Optronics will pose a threat to LG.Philips and Samsung," said Wang Wanli (王萬里), an analyst with Credit Suisse First Boston in Taipei.

In the wake of the deal, the company will have the strength to compete with South Korean firms to become a major panel supplier for computer giants Dell Inc and Hewlett-Packard Co, Wang said.

Chi Mei affected

Domestically, the AU Optronics-Quanta Display deal "would prompt Chi Mei Optoelectronics (奇美電子), Taiwan's second-largest flat panel maker, to ponder the feasibility of buying Chunghwa Picture Tubes Inc (中華映管) to quickly increase capacity," Wang said.

Chi Mei, which has about a 12 percent market share globally, has been playing catch-up by aggressively expanding production.

Yuanta Core Pacific Securities analyst Eric Lin (林宜正) said "the new entity will squeeze the space of small players like HannStar Display Corp (瀚宇彩晶) and Chunghwa Picture."

Local smaller players -- at the expense of profits -- rely on offering panels at lower prices than their bigger competitors to survive amid stiff competition in the highly volatile LCD industry, but that advantage would vanish, Lin said.

The merger will help AU Optronics strengthen its bargaining power and significantly reduce costs in sourcing components as well as operations, Lin said.

As a result, Lin said the AU Optronics-Quanta Display deal would have a positive impact on capacity expansion among panel manufacturers -- as the two companies are to review plans to add capacity in the near future -- which could in turn alleviate overcapacity pressure and stabilize falling panel prices.