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MediaTek to face mid-term pain over MStar deal: Nomura

2012/06/25 13:58:11

Taipei, June 25 (CNA) Taiwanese integrated circuit designer MediaTek Inc. will face short-term gain and mid-term pain after it decided to acquire smaller domestic rival MStar Semiconductor Inc., Japanese brokerage Nomura Holdings Inc. said Monday.

In a research note, Nomura said the deal shows the long-term ambition of MediaTek Chairman Tsai Ming-kai and MStar Chairman Wayne Liang to build a global-scale semi fabless company in view of the nature of competition and growth in the industry over the next three to five years.

"The immediate benefits that we expect are easing competition and better cost negotiating power. However, these are not strong enough to drive the top-two Asia fabless companies to consolidation," said Aaron Jeng, a Taipei-based Nomura analyst.

"We believe the key to the success of the deal is about execution and resource reallocation," said Jeng, who maintained a "buy" rating on MediaTek and kept a target price of NT$320 (US$10.69) on the stock.

Nomura estimates that 80 percent of MStar's workforce, mainly in handsets and televisions, does the same work as people at MediaTek.

"Our concerns, which we will watch closely, are whether the new MediaTek can retain MStar's talent and efficiently utilize the overlapping workforces," he wrote.

Jeng expects long-term synergies to occur from 2015 -- two years into the merger -- considering that it takes two years to plan and design new products.

MediaTek announced Friday that it will acquire a 40-48 percent stake in MStar in a tender offer between June 25 and Aug. 13 after months of intensive negotiations.

Under the deal, MStar's shareholders will get 0.794 MediaTek shares and NT$1 (US$0.03) in cash for every MStar share they hold.

MediaTek said after concluding the tender offer that it will soon open the next stage of the acquisition of MStar and plans to complete the merger of the two companies in early 2013.

"We note that MediaTek is working hard to break into major handset brands that would require significant resources," J.P. Morgan analyst Nick Lai wrote in a separate report.

"Combining the two teams is probably a better use of resources, instead of competing head-to-head in a similar set of customers," he said.

But with MediaTek and MStar claiming a high share of the TV merchant chip market -- over 80 percent combined in 2012 according to a forecast by J.P. Morgan -- a merger might leave TV brands reluctant to source their chips from only one vendor, Lai said.

Given that a number of TV chip vendors, such as Broadcom Corp., exited the market in 2011, the deal could open up opportunities for smaller vendors such as Taiwan's Novatek Microelectronics Corp. over the longer term, he said.

(By Jeffrey Wu)
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