Semi-conscious

China's chip land-grab sparks $8 bn of hasty M&A

China's chip land-grab has set off some hasty defensive deal-making. With state-backed Tsinghua Unigroup amassing a semiconductor empire through acquisitions, rattled rivals are rushing to secure assets, especially in Taiwan.

China has anointed Tsinghua Unigroup, backed by Beijing's prestigious Tsinghua university, to spearhead the development of a domestic semiconductor industry, correcting what it sees as a strategic weakness. Unigroup wants to take on giants Samsung, Intel and Qualcomm, and become the world's third-largest chipmaker.

It has struck deals worth more than $9 billion in just two years. Earlier this year, it made an informal $23-billion takeover offer for Micron, which the US memory giant rejected on national security grounds, according to Reuters. On December 11, Unigroup agreed to buy stakes in two Taiwanese companies, Siliconware Precision Industries (SPIL) and ChipMOS, for a combined $2 billion.

Now comes the pushback. On December 14, Micron agreed to take full control of Taiwan-listed joint venture Inotera Memories in a deal worth $4.1 billion, or $3.2 billion factoring in cash. The same day, Advanced Semiconductor Engineering (ASE) offered to buy out SPIL for $3.9 billion on condition the smaller rival cancels its tie-up with Unigroup.

Micron's move looks a sensible instance of vertical integration. Inotera already sells all of its chips to the US company, accounting for roughly a third of all the dynamic random-access memory chips Micron produces. A price of 3.6 times trailing EBITDA matches Micron's own lowly valuation. And controlling Inotera removes the risk the Taiwanese company will strike deals with Chinese rivals, analysts at Trendforce say.

ASE's intervention at SPIL is bolder. ASE already snapped up a 25 per cent stake in the latter three months ago, against the target's wishes, and SPIL is now suing ASE. So unless shareholders force SPIL's board to compromise, it seems unlikely to cancel the Unigroup deal. Even if it did, a takeover would strain ASE financially: a wholly debt-funded deal would see debt soar to 128 per cent of equity, Bernstein analysts estimate.

With Unigroup stepping up acquisitions, expect more messy deals like this.