Taiwan's UMC seeks funds to narrow gap with TSMC

* UMC says may seek investment from overseas chipmakers

* Aims to boost technology, efficiency to catch rival TSMC

* Looking to pursue acquisition in China market

TAIPEI, May 6 (Reuters) - United Microelectronics Corp's (UMC) 2303.TW plan to raise $411 million could pave the way for the world's No.2 chip foundry to seek the new technology and markets it needs to keep up with rival Taiwan Semiconductor Manufacturing Co (TSMC) 2330.TW as demand recovers worldwide.

UMC UMC.N said on Wednesday its board had approved a plan to raise more than T$13 billion ($411 million) via a private placement as it seeks opportunities for technology cooperation with partners or a strategic alliance. [ID:nTOE64404U]

TSMC TSM.N and UMC are racing to tap growing demand for chips, but analysts say UMC must broaden its customer base and sell more advanced chips with fatter margins to stay competitive, and could gain from investment from for example companies such as Texas Instruments TXN.N, one of its clients.

“If other chipmakers such as TI in the United States can invest in UMC, that would be good news because they can work on new technology together,” said John Chiu, who manages about T$10 billion of equity assets for Fuh Hwa Securities Investment Trust and has UMC shares in his portfolios. “But it will take some time before we can see a big leap.”

Big foreign chipmakers such as TI might help UMC move up the ladder by using smaller circuitry for more powerful chip designs for PCs, cell phones and flat-screen televisions. Squeezing more circuits onto a single chip also increases chip yields, boosting efficiency.

UMC’s operating profit margin stood at 12.7 percent in the first quarter, much lower than TSMC’s 37 percent, in part because sales of chips from advanced 40/65 nanometre process technology made up about 41 percent of TSMC’s sales whereas UMC will make a small amount of chips with 40 nanometre technology this year.

Further widening the gap between the two, TSMC will start using more advanced 20-nanometre process chip production technology in the second half of 2012.

U.S.-based chipmaker Globalfoundries may also be a potential investor if it aims to merge with UMC to compete with TSMC in the longer term, said Kenneth Lee, analyst at Fubon Securities Investment Services.

In a note on Thursday, Fubon said any investment by Globalfoundries would be positive, even it meant UMC might lose some management control.

With Globalfoundries merging its operations with recently acquired Chartered Semiconductor in Singapore to create a single contract chipmaker, adding an investment in UMC could further increase the potential threat to TSMC.

Investors cheered UMC's plan, sending its Taipei-listed shares up as much as 2.04 percent on Thursday before they settled 0.34 percent higher. The main TAIEX index .TWII fell 1.5 percent and TSMC lost 0.5 percent.

UMC may also use the money to pursue its plan to merge with Chinese chipmaker Hejian, of which it currently owns 15 percent. Such a move would allow it to tap robust demand on the mainland, but it needs final approval from shareholders in June to allow it to acquire the remaining 85 percent stake. [ID:nTP130150]

“UMC can serve more customers in China if it merges Hejian,” said Fuh Hwa’s Chiu. (US$1=T$31.6)