Hyundai's chips are down

Microchip magnified: a takeover would create a giant

A South Korean television programme about the semi-conductor giant Hyundai Electronics and its troubled relationship with the government sent the company's share price into a nose-dive.

I don't think it would be so easy to just let Hyundai go under

Jay Kim
ING Barings

The stock fell 15% on Wednesday as the programme sparked concern among traders that the company may go bust - despite analysts and fund managers agreeing that this was highly unlikely.

The confidence comes in the face of the company's heavy debt burden, and its reliance on bank finance.

"I don't think it would be so easy to just let Hyundai go under," said semi-conductor analyst Jay Kim at ING Barings.

"If (the banks) had wanted to, under strict market principles, they should have done it much earlier."

Debt difficulties

Hyundai Electronics is expected to have a tough time renewing debts of $2.6bn which are due for repayment later this year - despite reassurances by the state-run Korea Development Bank to help.

In December, the bank said it would pay 80% of any corporate debt the firm might have difficulty rolling over this year.

Falling chip prices

Analysts are wary about Hyundai's prospects because of the fall in chip prices in 2000, along with much uncertainty about this year's market conditions.

Hyundai could only watch as its share price tumbled

Falling demand for mobile phones and PCs has hit demand for computer chips.

The price of 64M S-DRAM (synchronous dynamic random access memory), the semiconductors that power computers, has slipped by about 50% since October and is now trading in the range $2.70-$2.90.

"We are becoming more concerned about the fundamental competitiveness of the company," said Kim in a research report.

Diversification

As the world's largest producer of DRAMs, Hyundai desperately needs to diversify, given that semi-conductors account for just less than three quarters of its revenues.

But to do so, it needs to raise more finance, and that is proving difficult.

Due to its financial difficulties, Hyundai Electronics is increasingly seen as a likely takeover target.

The microchip maker is ripe for takeover, say analysts

And ever more market observers see consolidation as a likely outcome following comments by South Korea's minister of commerce about possible cooperation between Hyundai and arch rival Samsung Electronics.

If the government tries to push for a big merger between the two firms, a new giant with a market value of about $25bn would be created.

Such a group would have a 40% share of the market for DRAMs - not necessarily such a good position to be in at the moment.

Samsung Electronics said it had no plans to seek a merger with its archrival, nor had it received pressure from the government.