When a company saw its accumulated losses reach NT$233.08 billion (US$7.67 billion) as of the end of last year, it was long past time to come up with a sound financial restructuring. On Friday last week, Nanya Technology Corp, the nation’s largest DRAM chipmaker, revealed plans to reduce its paid-in capital by 90 percent to NT$23.96 billion, in the largest capital reduction among publicly traded local firms.
Many businesses implement a capital reduction program to develop a better ratio of debt to cash reserves. For Nanya — which suffered a complete erosion of its net worth due to years of slumping business, but has recently returned to profitability — capital reduction is one way to recover a part of its losses while allowing it make dividend payments possible on the back of higher distributable reserves.
Prior to Friday’s announcement, Nanya had been seeking ways to strengthen its financial health for several years by selling shares to Formosa Plastics Group’s subsidiaries to raise funds and by cooperating with Micron Technology Corp to gain advanced production technology and cut costs. However, these efforts did not help enough.
As with most DRAM companies in Taiwan, Nanya’s biggest challenge is the lack of a strong pool of proprietary technology. As developing next-generation technology alone means a complex, time-consuming and very expensive process, most local DRAM makers have preferred using proven designs from abroad under royalty agreements to expand their capacity and boost market share.
During their heyday — before 2007 — Taiwanese DRAM companies enjoyed a combined share of more than 20 percent in the global market. However, short of core technologies that would improve their production, their market share dropped to just 6.5 percent in the fourth quarter of last year, compared with South Korean companies’ 64.2 percent and US firms’ 29.3 percent, according to DRAMeXchange’s statistics. Years of industry downturn and a volatile market have caused some makers to either withdraw from the market (ProMOS Technologies Inc), shift business from standard memory chips into wafer foundry (Powerchip Technology Co), or become simply contract-based suppliers (Inotera Memories Inc and Rexchip Electronics Corp).
Nanya has managed to stay afloat in the DRAM business by focusing on manufacturing specialty memory chips and adjusting its technology development program with Micron. The firm finally reported its first annual profit since 2007 last year and it wants to pay some of those profits to shareholders. As such, capital reduction could quickly enhance shareholders’ value and create a short-term return on equity effect because the number of issued shares decreases.
However, from a long-term perspective, shareholders may not benefit from a capital reorganization scheme if it is based on a conservative outlook regarding future performance. This concern is legitimate if no new products are in the company’s pipeline, or the market’s competitive landscape remains unchanged or, most importantly, the government’s industrial policy cannot enhance manufacturers’ competitiveness in the global market.
One should keep in mind that Nanya will not be the last technology company in Taiwan to raise its book value per share in appealing to investors through a massive capitalization reduction. If the government’s industrial policy remains out of step with public expectations and lacks both foresight and a sense of national development, and if businesses do not learn from the challenges facing the DRAM, LCD and other industries by building a viable business model, there will be more like this to come.