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Chips Ahoy!

14 July 2015 By Robyn Mak

Micron would be a less-than-fab deal for China. Beijing sees its reliance on foreign tech as a strategic weakness, and has already struck several small deals to boost its own semiconductor industry. Yet a mooted $23 billion purchase of the U.S. memory-chip maker would be a much tougher proposition.

The Wall Street Journal says Tsinghua Unigroup, controlled by the prestigious Tsinghua University, is preparing to bid $21 per share for U.S.-listed Micron, the world’s second-largest maker of DRAM chips for PCs, phones and servers.

In principle, that makes sense. Beijing is targeting huge growth in semiconductors – revenues rising 20 percent a year through 2020. And Unigroup has emerged as the national champion, recently spending $2.3 billion buying two other chip companies. Moreover, the political imperative probably means Unigroup can count on state funding for the huge sums required.

But there’s a long way to go. First, this deal sounds opportunistic. A 19 percent premium to the previous close looks cheap, especially since shares had halved this year. Slumping PC sales are a real problem. But an implied multiple of 7.8 times earnings for the year ending in August looks miserly when the industry trades on 15 times forward earnings. Shareholders – such as hedge fund manager David Einhorn, a loud and recent convert – may hold out for more.

Second, the deal will surely attract political scrutiny – especially since China’s efforts to beef up cybersecurity laws that favour domestic tech companies are already irking Washington. A Committee on Foreign Investment review could be hard going. It won’t be lost on U.S. officials that China has been pursuing deals for strategic reasons.

Third, owning Micron itself will not be straightforward. China has little experience buying and integrating foreign businesses of this size. This deal would be by some way the largest ever Chinese takeover of a U.S. company. Retaining Micron staff and management, bringing manufacturing operations to the mainland, and potentially consolidating the business with Unigroup’s other investments, will be no picnic.

 

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