NEC will absorb Renesas to become third-biggest chip maker

Japanese chip makers NEC Electronics and Renesas Technology plan to merge by the end of April 2010 to create the world's third-largest chip maker by revenue, with leading market share in microcontrollers and system-on-chip (SoC) products for cars and mobile devices.

The resulting company will be called Renesas Electronics Corporation, led by its current president and CEO, Junshi Yamaguchi, the companies said in a joint statement. The merger discussions were prompted by fierce global competition in the global chip market, they said.

NEC Corporation, the parent of NEC Electronics, earlier this year pledged to pursue "substantial reform" at its chip-making subsidiary, and the merger agreement appears to be the result.

Japanese companies often consolidate during downturns, analysts say. The two companies posted combined losses of ¥288.4 billion (US$3.2 billion) during their last fiscal year, which ended March 31, and combined revenue of ¥1.25 trillion (US$13.8 billion).

Their combined revenue would be enough to win third place in global chip rankings. Intel remained the world's largest chip maker last year on revenue of US$33.8 billion, according to market researcher iSuppli, followed by memory giant Samsung Electronics at US$16.9 billion and Toshiba in third with US$11.08 billion.

The new Renesas Electronics will have its work cut out for it to maintain the spot. The company will be boosted by an injection of ¥200 billion (US$2.2 billion) from the current owners of NEC Electronics and Renesas.

The two chip makers were both born in the aftermath of the dotcom bust early this decade. NEC Electronics was spun-off from NEC Corporation, and Renesas was created by merging the chip divisions from Hitachi and Mitsubishi Electric.

Once the merger is finalized, NEC Corporation will own 33.42 percent of Renesas Electronics, while Hitachi will hold a 30.72 percent stake in the company and Mitsubishi Electric will own 25.14 percent. The Japan Trustee Services Bank will also hold a 1.54 percent share.

The companies will need shareholder and regulatory approval for the merger.

Chip makers around the world were hurt by the global recession. Germany's Qimonda filed for bankruptcy in January, while Spansion of the U.S. followed in March. In addition, the Taiwan government formed a new company, Taiwan Memory Company, to lead consolidation among its heavily indebted DRAM makers.

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