Philips: Open to M&A options for chip unit

Philips: Open to M&A options for chip unit

Philips is open to all options for its chip manufacturing unit, including merging or selling it, as well as an IPO.

Analysts have been debating for years whether the semiconductor group of Koninklijke Philips Electronics would have more value as a stand-alone company or as a unit tucked inside the giant Dutch electronics group. Now they have an answer.

Philips has announced plans to create a separate legal structure for the chip manufacturing unit in a move that could see the company merging or selling the business, but also possibly acquiring another chip maker to achieve greater scale.

"With this move, we will be in a position to seriously consider various options that will allow the semiconductor unit to invest, grow and build scale," Philips president and CEO, Gerard Kleisterlee, said. "There are merger and acquisition options."

Under Kleisterlee's stewardship, Philips has been taking steps to steer the company away from volatile, cyclic businesses into more stable areas, and ones that show high profit margin potential, such as lighting, appliances and medical systems. The company is increasing its investment in all three of these areas.

"There is no change in our strategy," Kleisterlee said. "Our strategy is to build a stable, growing company with less volatility on the earnings line by strengthening our presence in health care, by investing in consumer health and wellness domestic appliances as well as new growth opportunities such as lighting, by stabilizing our consumer electronics business and by building an 'asset-light' semiconductor manufacturing business."

Over the past several months, Philips has embarked on a strategy to outsource an increasing percentage of its chipmaking business to third-parties. "Outsourcing will gradually rise to between 30 and 50 per cent of our requirements," he said. "This policy will not change."

The Dutch manufacturer, keen to curb the reliance of its in-house chipmaking on internal orders, has seen orders from external customers soar over the past few years. "Today, only eight per cent of total sales are internal," CEO of the semiconductor unit, Frans van Houten, said. "That means 92 per cent of sales go to customers around the world."

Kleisterlee described the task of transferring the chip business into a legal structure as tedious, and one that will take up until the second half of 2006 to complete.

During that time, Philips will continue to implement its "business renewal program" aiming to improve the unit's competitiveness and, in particular, profitability, van Houten said. The goal is for the profit margin in the chip business to range from 5 per cent at the bottom of the industry cycle to 15 per cent at the top.

In 2004, the chip unit posted sales of Euro 4.7 billion ($US6.4 billion), according to van Houten.

Kleisterlee declined to comment on which of the options -- merge, sell or buy -- is most preferred. He said the company was open to "all options," including a possible initial public offering (IPO).

Last month, German semiconductor manufacturer, Infineon Technologies, announced plans to move its memory-chip business into a separate company and seek a separate listing for it.

The CEO also declined to say whether Philips is currently in talks with other chipmakers. However, he did say that if the Dutch company chose to team with another manufacturer, that partner would have to have strengths in one or more of the four areas of chip production targeted by Philips. The four areas are mobile communications, home devices, multimarket semiconductors and automotive and identification.

Philips will also continue to sell stakes in its chip manufacturing joint ventures, according to Kleisterlee. Last week, the company sold a 5 per cent stake in LG Philips LCD reducing its stake to 32.9 per cent.

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