Stock plan leads to speculation of UMC buyout

Buyout fever in the chip industry prompted speculation Wednesday that a stock reduction plan by United Microelectronics Corp. (UMC) meant it might be up for sale, but a company spokesman said that’s not the case.

A plan by the world’s second largest contract chip maker to cancel 5.7 billion shares sent its stock soaring 11.2 percent on the New York Stock Exchange to end normal-hour trading on Tuesday at US$3.67. The shares rose further in after-hours trading. UMC shares listed on the Taiwan Stock Exchange rose by their market-imposed daily limit on Wednesday to NT$20.95 (US$0.64), up 6.9 percent.

“There has been a lot of leveraged buyout activity around the world, and UMC’s stock rose partly because people think it might be positioning itself for something,” said Andrew Teng, a manager at Taiwan International Securities in Taipei.

The speculation on Wednesday centered on the idea UMC might be preparing for a buyout due to a spat with the Taiwan government over China. Being bought out by a foreign company could solve the company’s problems, analysts say.

When the Carlyle Group entered talks to buy Taiwanese chip maker Advanced Semiconductor Engineering (ASE) last November for US$5.5 billion, analysts said one big plus was the deal could free ASE from strict Taiwanese rules on China investments.

“Even though ASE has made some investments in China, the various restrictions do not allow it to offer high-end services to its international clients in China,” wrote Gartner analyst Jim Walker in a recent report. “With ownership by the Carlyle Group, a new company can be formed and based in the United States or elsewhere, and it may not be subject to Taiwanese government restrictions regarding China.”

Taiwan and China remain enemies after splitting in 1949 amid civil war. The island fears China could use chip technology to bolster its military. Chip makers on the island find the rules a hindrance. Despite the strained relationship, China remains the favored destination for Taiwanese investment due to their shared language and culture, as well as China’s lower costs and incentives for building factories.

The idea of a takeover by a foreign buyer appealed to the founder and honorary chairman of UMC, Robert Tsao, who said UMC should look into such a deal.

Tsao is a prime example of the difficulties Taiwanese tech companies and executives face over China. He and another key UMC executive resigned last year after being indicted by Taiwanese prosecutors over their alleged role in the establishment of Chinese chip maker, He Jian Technology (Suzhou) Co.

The government has levied fines on UMC and some executives at UMC and He Jian over the affair. The court case is still being heard, and Tsao and his colleague maintain that they have done nothing wrong.

But the company is not currently in any buyout talks, said Alex Hinnawi, a spokesman at UMC. The move to cancel shares and pay stockholders an NT$3 dividend for each share they own is aimed at returning cash to shareholders, he added.

Despite the denial, Teng said the financial restructuring would still make UMC a better target for a leveraged buyout.

Private equity firms have been on a buying spree in the chip industry this year. In December, a group finalized the purchase of Freescale Semiconductor for US$17.6 billion, while Koninklijke Philips Electronics sold a majority stake in its chip unit to another group for around US$10.6 billion in September.