TOKYO Japanese semiconductor maker Rohm Co 6963.OS said on Wednesday it would buy smaller rival Oki Electric Industry Co's (6703.T) microchip operations for about 95 billion yen ($913 million), signaling a further shake-up in Japan's chip industry.
Under the deal, Oki will first spin off its chip-making business into a new company and sell a 95 percent stake in the company to Rohm.
Rohm and Oki said they aimed to complete the deal on October 1.
Japan's semiconductor makers once dominated the global market with dynamic random access memory (DRAM), the most common kind of chip for personal computers. But they have been hurt by stiff competition from Samsung Electronics Co (005930.KS) and others as well as the heavy cost of developing cutting-edge products.
Rohm, Japan's No.8 chip maker and a strong player in custom chips, aims to bolster its product line-up by adding the semiconductor operations of Oki, which specializes mainly in system LSI chips used for digital consumer applications.
For Oki, spinning off of a business that requires heavy capital expenses should help it focus on its other growing businesses such as information technology systems and printers.
"The semiconductor business that Rohm is going to acquire overlaps little with Rohm's existing chip businesses, and the deal is expected to help both Rohm and the newly created company improve profitability," Rohm and Oki said in a statement.
Oki generated 138.2 billion yen in sales from the semiconductor business in the year that ended in March, and is ranked No.13 among Japan's semiconductor makers. The company logged 25 billion yen in capital spending last year -- about 3.5 percent of its revenue.
Shares in Rohm ended down 1.5 percent at 6,510 yen ahead of the announcement. Oki rose 3.8 percent to 218 yen.
ANALYSTS IN FAVOUR
"This works for both parties. They are midsize companies in sales and it would be difficult for each of them to keep carrying out capital investments alone," iSuppli Japan Vice President Akira Minamikawa said after a media report on the deal on Wednesday.
"This would enable Rohm to take advantage of Oki's technology and production equipment in offering products with finer circuitry."
Finer circuitry reduces chip size and enables faster data processing. It also cuts production costs.
But as the industry moves to ever finer circuits, development and production facility costs increase sharply.
The move will create Japan's seventh-largest semiconductor maker in terms of sales and mark the first major realignment in Japan's chip industry since 2003, when Hitachi Ltd (6501.T) and Mitsubishi Electric Corp (6503.T) merged their system chip operations.
Still, the firms' combined chip sales of $3.5 billion are a far cry from the $34 billion at Intel Corp. (INTC.O), the world's biggest semiconductor maker, iSuppli data showed.
Hit by fierce price competition, Japanese semiconductor makers are looking for ways to sharpen their products' competitive edge. Analysts expect more companies, especially those second- or third-tier in their sector, to withdraw from unprofitable businesses.
"If they (companies) want to survive, they need to add something special in their products, something that other companies' can't offer," said Chibagin Asset Management's senior managing director Fujio Ando.
Rohm's chip business once had an operating profit margin of over 30 percent, but that slipped to 18 percent in 2007/08 amid intense price competition.
(Additional reporting by Kiyoshi Takenaka, Nathan Layne and Sachi Izumi; Editing by Brent Kininmont and Hugh Lawson)