TOKYO Toshiba Corp is in talks to merge part of its chip operations with the semiconductor unit of NEC Corp, a person with knowledge of the negotiations said, as they struggle with slumping demand and prices.
Toshiba's stock slid 17 percent after the news and its forecast of its biggest annual loss ever, which led to a rating cut by Goldman Sachs.
Semiconductor makers have been looking to merge or form alliances to survive a sharp downturn that has pushed much of the industry into the red and some to seek government help.
Toshiba said on Thursday it may spin off its system and discrete chip operations, a move that would make it easier to merge those businesses with another firm.
Toshiba is in discussions to combine its system chip business with NEC Electronics Corp, a semiconductor firm majority owned by NEC Corp, said the person, who spoke on condition of anonymity because the talks are not public.
His comments follow a report by the Nikkei business daily that Toshiba and NEC were in talks. The paper also said NEC has also been talking with Fujitsu Ltd about merging their chipmaking operations.
Investors said they were not particularly impressed about the potential of Toshiba-NEC Electronics chip union.
"It's a losers' union," said Fumiyuki Nakanishi, manager at SMBC Friend Securities. "Despite some cost cut impact, it's doubtful if they can beat their international rivals even as a team. The domestic chip industry appears at the brink of death."
Toshiba Chief Executive Atsutoshi Nishida said on Thursday that too many chip makers, especially those who make system chips, are fighting it out in Japan and that they need to consolidate to win globally.
Toshiba spokesman Keisuke Ohmori declined to comment on Friday about the possibility of a merger of its system chip operations with NEC Electronics.
NEC Electronics said in a statement that each company must prioritize reform and that it would push forward with its own restructuring including cost cuts of $890 million over two years and eliminating 1,200 contract jobs.
Fujitsu has been looking for a buyer, partners and other ways to turn around its chip operations, but spokesman Mokoto Koshi said nothing had been decided.
Toshiba, which has concentrated on NAND-type flash memory chips used in portable music players and digital cameras, aims to cut costs by $3.3 billion in the next business year.
System chips control multiple functions in electronics or cars and look like a maze of circuits on a single sliver of silicon, while discrete chips are simpler semiconductors and control functions inside bigger integrated microchips.
Toshiba's stock dived 17.4 percent to 318 yen. Goldman cut its rating on Toshiba shares to "sell" from "neutral" and said the company would need to consider equity financing.
NEC's stock dropped 6.5 percent to 245 yen but shares of NEC Electronics climbed 4 percent to 630 yen. The benchmark Nikkei average fell 3.1 percent.
If Toshiba's system and discrete chip operations and NEC Electronics merge, the combined business would have annual revenue of 1.5 trillion yen ($16.7 billion), based on their 2007/08 sales.
That would be bigger than the chip unit of Samsung Electronics Co at current exchange rates. Memory chips account for most of Samsung's semiconductor sales.
Tatsuya Mizuno, a director at Fitch Ratings, said any merged entity would benefit from lower development costs and capital spending, but it would not necessarily mean a boost to competitiveness against global rivals.
"It could be just like Elpida and Renesas, which had some good effects but did not result in definite strength," he said.
Elpida Memory, which was born out of dynamic random access memory (DRAM) businesses of NEC and Hitachi Ltd, is in consolidation talks with Taiwanese chipmakers.
Renesas Technology Corp, a chipmaking joint venture of Hitachi and Mitsubishi Electric Corp, is expected to book a net loss of about $2.2 billion this business year.
(Additional reporting by Aiko Hayashi and Taiga Uranaka; Editing by Edwina Gibbs)