13 February 2004
Singapore-based ST Assembly Test Services Ltd (STATS) and US-based ChipPAC, Inc. announced on 10 February that they would merge operations in a stock-swap deal worth US$1.6 billion. While the stock price for STATS fell sharply on concerns that it may have overpaid for its share of the deal, analysts are generally positive on the merger's impact on operations.
The combined entity will be called STATS ChipPAC Ltd. and be headquartered in Singapore. STATS shareholders will own 54 percent of the combined company while ChipPAC shareholders will own the remainder. Its services will include mixed-signal test, strip test, chip-scale, stacked die, flip-chip, wafer level and system-in-package technologies, and wafer bumping capabilities.
ChipPAC reported revenue of US$429 million in 2003, taking a US$28 million loss. STATS revenue totalled US$380 million in 2003, with a loss of US$2.3 million. Both companies have predicted significant double-digit growth in 2004, which is in line with forecasts from competitors.
The main benefit of the merger is the economy of scale that can be achieved by the combined operation. The combined company expects to take in more than $1 billion in revenue this year, up from about $800 million in 2003. In the process, it expects to generate US$25 million to US$30 million in cost savings.
There is also a good complementary fit between the two companies. STATS and ChipPAC have few customers in common. And while STATS has plants in Singapore and Taiwan, ChipPAC has plants in China, South Korea and Malaysia. The combined entity would have factories in all the countries where the world's major computer chip foundries are based.
STATS effectively paid a 47 percent premium to the last traded price of ChipPAC stock for the acquisition. This has been the main criticism of the deal. However, STATS lost money in three of the last four years. If the merger can turn the company from a perennial money-loser into a sustainably profitable company, the price may be worth paying.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.