Fri, Aug 25, 2000 page18

• Siliconware's earnings may be hurt by merger

  ONE-STOP SHOP Siliconware Precision Instruments aquired Siliconware Corp, thereby combining the manufacturing and testing of intergrated circuits

  • By Thomas Ker / CONTRIBUTING REPORTER
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  Siliconware Precision Industries Co's (SPIL, 矽品) acquisition of Siliconware Corp (SWC, 矽豐) will benefit SPIL in the long term by creating a "one-stop shop" for customers for integrated circuit packaging and testing, securities analysts said yesterday.

  However, the acquisition of a relatively small IC testing company that recently downgraded its profit forecast for 2000 will hurt SPIL's earnings in the short term, they said.

  SPIL, Taiwan's second largest chip packaging company in Taiwan, on Tuesday announced it would acquire Siliconware Corp through an all-stock transaction.

  SPIL will issue 173.7 million shares and swap them for outstanding Siliconware Corp shares at an exchange ratio for Siliconware Corp to SPIL of 1 to 0.6.

  The companies expect to complete the merger on Dec. 30, 2000. The merger would consolidate group resources and further enhance operational efficiency, said SPIL vice chairman Bough Lin. It's also strategically the right thing to do, said Michael Cheng, semiconductor assembly and test analyst at Salomon Smith Barney.

  "There is definitely a case for assembly and testing integration because customers want one-stop shopping," Chang said.

  SPIL had originally planned to integrate the two through the creation of an alliance in response to the continued strong global demand for semiconductors, particularly for telecommunications and IA products.

  Demand for chips also means demand for the final stages of the semiconductor production process -- IC packaging and testing.

  Through the alliance, SPIL would expand its market share and avoid the high cost of acquisitions. Already, it had agreements with Siliconware Corp, Siguard Microelectronics Corp. and ChipMos Technologies, Inc.

  However, SPIL may have decided to acquire Siliconware Corp because it already had a 32.3 percent stake in the company, and Siliconware Corp is struggling in an increasingly competitive market in which size is increasingly important, analysts said.

  At the beginning of August, Siliconware Corp cut its forecast of net profit for 2000 to NT$226 million from NT$843.7 million.

  "If Silicon Corp can't do well, it will definitely have an impact on Siliconware Precision," said an electronics analyst at SG Securities. "Silicon Precision has quite a good management team, so they will improve Silicon Corp," he said.

  The chip testing company will also benefit from SPIL's brand name and its ability to fund Silicon Corp's future expansion, he said.

  In the short term, however, SPIL's earnings per share will be diluted by the share issue. In return, it will merge with what has been an increasingly unprofitable company and with which cost savings will be small.

  "We have downgraded its long-term price target to NT$90" from NT$100, said an analyst at China Securities Co.

  The IC packaging industry also has at least one and a half good years ahead, said the analyst. "In good times, it doesn't make sense" to merge, he said.

  SPIL is also currently operating in a very competitive and busy market; now it will have find the resources to manage another company, analysts said. "Arguably, they should have done this in 1999," said Salomon Smith Barney's Cheng.

  The concerns were reflected in SPIL's share price on the first day of trading following the acquisition announcement. The stock fell 3.81 percent to NT$50.50 on turnover of 19.24 million shares, the highest amount this month.

  Nevertheless, despite the short-term gloom, analysts were upbeat about both companies longer-term prospects.

  While the merger may create a vertical integration in terms of the production process, it will also form a horizontal kind of integration, because that is the service and the efficiency that customers are looking for, analysts said.

  "In this business, big is definitely going to be better," said Cheng.

  SPIL recently reported its first half net income had increased to NT$1.48 billion, or NT$1.29 per share, up from NT$786.8 million, or NT$0.70 per share, for the same period a year earlier.

  First half revenue had risen to NT$8.64 billion, from NT$4.96 during the same period a year ago.
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