A Marriage Made in Chip Heaven

Intel and STMicroelectronics are combining their flash-memory chip operations, with an investment by private equity firm Francisco Partners

by Arik Hesseldahl

In the unpredictable, cutthroat market for computer chips, win-win outcomes are rare. But that may well be the outcome of a decision by Intel and STMicroelectronics to combine their flash memory operations. The joint venture forms the world's largest manufacturer of a type of flash memory chip known as NOR flash.

It also rids both companies of a painfully unprofitable drag on profit. "This business has been a perpetually unprofitable for Intel, and just carving it out should expand Intel's gross margins by a nickel a share," says analyst Ashok Kumar of CRT Capital.

The biggest winner, though, may be Spansion (SPSN), the NOR flash business formerly owned by Advanced Micro Devices (AMD), Intel's main rival in computer chips. On May 22, Spansion stock gained $1.01, or 9.7%, to $11.45, on optimism that the joint venture will be less formidable a rival than either partner when it was backed by a deep-pocketed parent.

Private Equity Participation

Intel (INTC) and STMicro (STM) reached the deal with Francisco Partners, a private equity firm in Menlo Park, Calif., that's providing $150 million. The yet-unnamed venture will be based in Switzerland, and combines operations that last year generated some $3.6 billion in revenue. Brian Harrison, general manager of Intel's flash operations, will be its chief executive, and Mario Licciardello, general manager of STMicro's flash business, will be its chief operating officer. STMicroelectronics will own a 48.6% equity stake in the new venture while Intel will control 45.1%. In exchange for its investment, Francisco Partners will receive preferred stock worth 6.3% of the equity.

The deal had been rumored for some time, and analysts had recently been peppering Intel with questions about its plans for the unprofitable NOR flash operations. Intel stock rose 36¢ on May 22, or 1.6%, to $22.99, while STMicro picked up 38¢, or 1.9%, to $20.26.

The operations were no barn burner for either company lately. STMicro's flash business had a loss of $53 million on sales of $1.5 billion in fiscal 2006, and recorded a $17 million loss on revenue of $323 million in the first quarter of 2007. The losses were bigger at Intel. In the most recent quarter, the unit reported an operating loss of $283 million on sales of $469 million. The loss for fiscal 2006 was $638 million on sales of $2.1 billion. Flash accounted for more than 6% of Intel's sales last year.

Pressure on Prices

NOR flash chips are used widely in wireless phones, consumer electronics, and automotive and industrial applications. But the sales have been under pressure of late, slumping 12%, to $1.9 billion, in the first three months of 2007, according to iSuppli, as other forms of memory have come to the fore. That has put pressure on NOR flash prices and sown the seeds for consolidation in the industry. Among the top suppliers, only Samsung saw any revenue growth during that period. "It's a tough market because it's a mature market," says iSuppli analyst Nam Kim. "There's so little potential for any real growth, and so we expected some consolidation to happen. This is clearly the right way to go."