Infineon in preliminary pact with Toshiba on chip

James Mackenzie & Sabine Bub

DRESDEN, Germany: The chief executive of Germany's Infineon Technologies AG

said on Tuesday that he had reached a preliminary agreement with Toshiba Corp.

which could give Infineon most of the Japanese group's business in the ailing

computer memory chip market.

However, any deal must still be approved by the supervisory boards of both

companies, Infineon CEO Ulrich Schumacher said in an interview at a company

briefing for analysts and press that was under way at a hotel here.

"We're hoping and we're crossing our fingers," Schumacher told

Reuters when asked if the two companies could seal the complex deal by the end

of the year. The companies have been in talks to combine their operations to

form one of the world's three largest computer memory chip-makers.

The discussions are said to concern the formation of a computer memory joint

venture that Infineon would control and a separate venture for so-called flash

memory used in consumer electronics products which Toshiba is expected to

dominate.

While executives at the operational level have agreed on the outlines of a

deal concerning the computer memory business that would be controlled by

Infineon, a side deal involving flash memory operations require further talks,

he said.

"Flash is still in the background at the moment," Schumacher said

at the margins of an event held to mark the launch of the company's most

advanced chip-making factory near Dresden in eastern Germany set for Wednesday.

Outline of preliminary agreement is reached

Asked whether a plan had been presented to the Infineon supervisory board, he

answered, "In broad outline, yes." "There is a model which we

have worked out and that will be presented to the boards and we'll have to see

whether it can be passed," Schumacher later told reporters.

Schumacher said Infineon had insisted that a deal would not require any

payment by his company in exchange for Toshiba assets or to cover the costs of

restructuring the Japanese company's ailing computer memory chip business.

"It can't cost us a single mark for the next 18 months," the German

executive said. "It's a hard demand but that's the way it is."

A deal, which besides giving Infineon control of Toshiba's memory chip

business, would also give the company a stake in the emerging "flash

memory" market for consumer electronics, sources familiar with the talks

have told Reuters.

The need to cut capacity and drive down costs in the troubled memory chip

sector has led to a round of consolidation from which three major players are

set to emerge. Besides the Infineon-Toshiba link, US-based Micron Technology,

Inc. and Korea's Hynix Semiconductor, Inc. are in talks on an alliance to

challenge market leader Samsung Electronics Co. Ltd.

Infineon is expected to take up to 80 per cent of a joint venture with

Toshiba which would merge the two companies' ailing units that make dynamic

random access memory (DRAM) chips.

Infineon is the world's fourth largest maker of these personal computer

chips, behind Samsung, Micron and Hynix.

In return, Toshiba, a comparative lightweight in the DRAM sector with the

sixth largest market share, will give Infineon a 20 per cent stake in its

business for NAND flash memory chips, used in products such as mobile phones and

digital cameras.

Infineon does not now make flash memory chips but it produces a range of

other chips for European technology giants Nokia and Siemens AG. This offers

Toshiba access to the European leaders in mobile phones, now the world's biggest

consumer electronics segment.

While both companies remain cash-strapped during the worst downturn in

semiconductor industry history, Toshiba's five-year-old DRAM plant needs

upgrading at a cost of some $450 million. Its other eight-year-old facility may

need to be shut down, according to analysts.

Infineon keen, but Toshiba may drag its feet Those terms could still prove a

bitter pill for Toshiba's corporate board to swallow and delay any final

agreement.

The chief executive of Toshiba's semiconductor operations, Takeshi Nakagawa

told Reuters on Tuesday that talks with Infineon were continuing and he did not

know whether they would be concluded before the end of the year. The deal would

offer Toshiba an exit from the commodity DRAM business, where manufacturers have

been posting heavy losses for the past year as prices have plunged to about half

the cost it actually requires to produce them.

The industry is suffering under the weight of falling demand from PC vendors

and crushing overcapacity as demand for personal computers, the main use of such

chips, has slowed.

Meanwhile, Infineon has been looking to cut its dependence on the memory

segment, which last year generated some 40 per cent of sales, by expanding in

areas like communications and smart cards but it does not want to exit the

business. The reason for clinging on is that at the best of times, like last

year, it accounted for over 80 per cent of Infineon's operating profit.

(C) Reuters Limited.