UPDATE 2-Japan firms talk on system chip tie in reform drive -sources

Tue Feb 7, 2012 10:06pm EST

* Renesas, two others in talks to merge system chip ops -sources

* Production would be outsourced to Globalfoundries -sources

* Japan chipmakers under pressure for drastic reforms

* Deal is one of many options under review -source

* Renesas, Elpida shares surge

By Reiji Murai and Maki Shiraki

TOKYO, Feb 8 (Reuters) - Renesas Electronics and two other big Japanese chip makers have begun talks to combine their system chip operations and outsource production in a government-backed deal, sources said, as pressure mounts for drastic reforms to confront stiff global competition.

Japan's once high-flying chip sector has been forced into a a series of mergers and restructuring drives over the past decade to keep up with aggressive competitors in South Korea and Taiwan, led by Samsung Electronics, but many analysts have urged more dramatic moves.

Fujitsu Ltd, Panasonic Corp and Japan's government-backed Innovation Network Corp, an investment fund, would also be part of the deal, which envisions outsourcing production to privately held chip maker GlobalFoundries, the sources familiar with the matter said. The California-based foundry is also looking at a possible purchase of cash-strapped Elpida Memory's plant in Hiroshima, they said.

"This is just one of many options under consideration," one of the sources said, adding that other areas of the chip sector were also under discussion and there could be further twists and turns as talks proceed.

The Nikkei business daily, which first reported the talks, also said GlobalFoundries would consider buying Renesas and Fujitsu plants in Japan and that Elpida, which has been battered by a strong yen and tumbling memory chip prices, would move its production of DRAM chips to Taiwan.

The news sparked a surge in chipmaker shares, with Renesas jumping as much as 14 percent to a three-month high of 576 yen and Elpida climbing to an intraday high of 374 yen, up nearly 10 percent. Fujitsu rose 5 percent to 399 yen.

"The first observation is that it looks good for every company -- Elpida, Fujitsu, Panasonic and Renesas," said Yasuo Sakuma, portfolio manager at Bayview Asset Management.

But he remained sceptical.

"It's like the bad parts of a banana, apple and orange getting put together in a mixer to make juice. If you drink that it may taste good the first time. But the juice will go bad in a couple of days."

Elpida said in a statement that the report on the sale of the Hiroshima plant was incorrect, but gave no details.

Renesas said in a statement that it had made no such decision, while Panasonic and Fujitsu said in separate statements that they were considering various strategic options for their chip businesses but nothing had been decided.

BAD JUICE?

Under the plan, the new company will develop system chips, which serve as the brains of electronic gadgets and automobiles, leaving the production to Globalfoundries. The government's Innovation Network Corp would play a major role in supplying capital.

The Nikkei said the three companies were expected to hammer out a basic agreement by the end of March and aim to set up a new company by the end of this year. But one of the sources suggested the time frame was too ambitious, especially given that various options were under review. Another said Fujitsu was involved in the talks but not decided to join an alliance.

Haruo Sato, senior analyst at Tokai-Tokyo Securities, saw potential snags to an agreement.

"The top management of the three companies would have to reach agreements on tough issues such as allocation of resources, including job cuts. I think it will be extremely hard for them to reach a compromise," he said.

Japanese chipmakers have been hit hard over the past year by a sluggish economy and a strong yen, with many falling into the red on an operating basis.

Renesas, itself the product of successive mergers of the chip divisions of Hitachi Ltd, Mitsubishi Electric and NEC Corp, reported an operating loss of 33.2 billion yen ($430 million) for the nine months to Dec. 31.

Elpida, set up to take over the struggling DRAM operations of several Japanese chipmakers a decade ago and now scrambling to meet debt repayment deadlines in late March and early April, last week posted a wider-than-expected 43.8 billion yen operating loss for the October-December quarter.

Speculation has swirled that Elpida was seeking a rescue deal with U.S. DRAM maker Micron Technology and its Taiwanese technology partner, Nanya Technology, although Elpida President Yukio Sakamoto at last week's earnings announcement played down the need for an immediate equity tie-up.

Japanese chip industry leader Toshiba Corp, which has largely remained above the merger fray in recent years, cut its full-year operating profit forecast by one-third to 200 billion yen after posting a 72 percent drop in third-quarter operating profit to 10.5 billion yen.