By deciding to go it alone, Hynix Semiconductor Inc has adopted a most Japan-like survival plan: Sitting back and hoping the market will bail it out. It's a risky strategy, and one that's been a failure in Japan.
Hynix this week sent Micron Technology Inc back to Idaho empty handed. The embattled company's board of directors killed a US$3 billion sale to Micron, undoing five months of talks to form the world's biggest computer-memory chipmaker. It was a blow to the government, which was eager to put the Hynix affair behind it.
No such luck. Rather than sell, Hynix placed a high-stakes bet that a rebound in prices for dynamic random access memory chips will keep it afloat. Board members reckon that if chip prices, which have tripled in value since December, continue rising, Hynix can secure more write-offs on US$5 billion in debt and prosper.
PHOTO: AP
Trouble is, it's a big "if" -- huge, in fact. Creditors, after all, were quick to say new loans aren't likely. That leaves Hynix with the dubious distinction of putting itself in the same class as Japanese banks. Japan's once-vibrant financial entities also have looked to the marketplace for redemption.
Japan's banking sector has been letting its bad-loan problem worsen for a decade now. All along, banks have used loopholes and creative accounting practices to avoid reporting the full impact of their losses resulting from bad loans. Similar maneuvers have enabled banks to put off marking long-term equity holdings to current market value in quarter-end and fiscal-year-end financial statements.
When Japanese banks unveil loss estimates, they're always more manageable than accurate. Executives hope the stock market will improve and make their balance sheets look less fragile.
Then, they wouldn't have to confess to being insolvent, or on the verge of being technically broke.
Trouble is, the Nikkei 225 stock average has been trending lower for more than a decade now. That's forcing bank executives to spend much of their time covering up last year's cover-up of the cover-up the year before that. All of this would be less disturbing if banks or their government regulators were taking steps to correct things. They're not.
Taro Aso, the ruling Liberal Democratic Party's chief policy maker, last month assured reporters that international observers are "mistaken" if they think Japan should tackle its problems immediately. If land and share prices "rose a bit," Aso argued, then that "would clear out a sizeable portion of the bad-debt problem." These points are troubling on a couple of levels, especially when voiced by the man who's in the know about Tokyo's plans.
First, they suggest the LDP isn't rolling up its sleeves to fix Japan's comatose economy. Second, they indicate Tokyo is still waiting around, hoping rising markets and global growth will bail it out -- again.
Taking a page from Japan's banks, Hynix is banking on a rebound in prices for 128-megabit dynamic random access memory chips. In fact, Micron has to be wondering if Hynix was merely stringing it along, waiting for chip prices to rise. Whether Hynix's strategy will work -- and whether the company can survive long -- is anyone's guess, but investors already are questioning it.
"Hynix may have bluffed its way through the down cycle, but they're not out of the woods yet, and their technology will remain behind the times," says Patrick Choo, who helps manage US$70 million of Asian stocks at Kingsway Fund Management Ltd.
Why Hynix's board quashed the deal isn't hard to understand.
Micron's bid was bitterly opposed by union workers and aggrieved shareholders. As board members met Tuesday, both groups took to the streets and rallied outside Hynix headquarters. Shareholders felt Micron wasn't offering enough; workers feared ownership by a foreign company would lead to job cuts.
Equally understandable was the government's disappointment.
Seoul had been eager to complete the sale to get Hynix off the radar screen. Micron's bid seemed a sure way to clean up one of South Korea's biggest corporate-debt problems and enable banks to recoup debts. Seoul also hoped to convince global investors reforms are on track. A deal would've dovetailed nicely with this week's agreement by General Motors Corp to buy Daewoo Motor Co.
That's why the South Korean government and Hynix creditors are considering dumping management and trying anew to sell the chipmaker to an overseas investor, possibly even Micron.
Less clear is whether Hynix is proceeding prudently. Remember that the only reason Hynix staved off bankruptcy last year was because of two multibillion-dollar bailouts. More handouts don't seem forthcoming; South Korean Finance Minister Jeon Yun-churl Wednesday said that creditors shouldn't give Hynix fresh loans.
Say, for a moment, that Hynix does try to go it alone.
Rebounding chip prices will help in the short run, but few analysts or investors believe Hynix can survive on its internal cash flow. What if the market goes bad? What if the US falls back into recession, taking global chip prices down with it? A quote in The Korea Times Wednesday was instructive on that front. An unnamed board member told the newspaper that "considering current market conditions," Hynix's "profitable independence is attainable." The operative -- and loaded -- word here is "current." Any executive who believes "current" market conditions live on indefinitely is sure to be out of a job before long.
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