Infineon to spin out DRAM business

Infineon Technologies AG has decided to spin out its memory business and is considering taking the unit public, the German company announced Thursday. The move has long been anticipated by analysts as Infineon has struggled to make money in the boom-and-bust cycle that characterizes the DRAM (dynamic RAM) business.

“This has been rumored for a long time,” Joseph Unsworth, a senior research analyst with Gartner, said in a phone interview Thursday. “The DRAM business is very cyclical and is driven by boom-and-bust cycles.”

Unlike its other memory peers like Samsung Electronics Co. Ltd. who have managed to move over to the more vibrant and profitable NAND flash memory business when the DRAM market has been languishing, Infineon has struggled with the newer technology, according to Unsworth. While DRAM is mostly used in PCs, NAND is used in digital cameras and Apple Computer Inc.’s iPod music player.

Infineon’s supervisory board has agreed to a realignment proposal from the company’s management board to create two independent companies, one focused on Infineon’s memory products, the other on its logic business, according to a company release.

Infineon will focus on the logic business consisting of its automotive, industrial electronics and multimarket (AIM) units and its communications operations. The firm plans to spin off its memory products business as a separate legally independent entity by July 1, 2006, the release stated. The new company will continue to have its headquarters in Germany and its technology development center in Dresden and will be led by Kin Wah Loh, a member of Infineon’s management board and head of the company’s memory products group.

After the spinoff, Infineon’s “preferred option” is to take the memory unit public via an initial public offering (IPO), according to the release. Infineon would invest any money generated by the IPO in expanding its logic business, the release added. Infineon itself was founded in April 1999 when Siemens AG spun out its semiconductor operations. Infineon then went public less than a year later in March 2000.

As a spun-off company, Infineon’s memory products unit will be the fourth-largest DRAM vendor in the world, according to Gartner’s rankings. There are 14 major DRAM vendors in today’s market and further consolidation is likely, according to recent Gartner research. While 2004 was a good year for DRAM sales, it’s likely that the new memory-product company’s IPO would likely coincide with one of the DRAM bust cycles, Unsworth said. “We’re not expecting a very good year [for DRAM] in 2006 and we’re predicting a downturn in 2007,” he added.

Prior to Thursday’s news, rumors were rife that Infineon might sell off its DRAM business to Taiwan’s Nanya Technology Corp. The two companies already have a close working relationship via their joint DRAM venture, Inotera Memories Inc., first set up in December 2002. Then in September, Infineon and Nanya stepped up the agreement to co-develop 60-nanometer manufacturing technology in addition to the 70-nanometer and 90-nanometer processes they were already engaged in.

Nanya’s main shareholder, Nanya Plastics Corp. of Formosa Plastics Group, is cash-rich, Unsworth noted, so it’s possible Nanya might try to acquire Infineon’s spun-off memory-products business or look to become the major shareholder following the unit’s IPO.

Infineon’s memory business accounts for about 40 percent of the company’s revenue, according to Unsworth. The spinoff of the unit has been in the cards ever since Wolfgang Ziebart became head of Infineon in September 2004, the analyst said.

The main rationale Infineon is giving for the move is the diverging nature of its memory and logic operations, meaning running them as separate businesses makes more sense than trying to accommodate their very different needs within a single company. “For memory products, ‘time-to-market’, manufacturing efficiency and direct access to capital markets are essential,” Ziebart, president, chief executive officer and chairman of Infineon, was quoted as saying in the release. “For logic products, a profound understanding of applications, as well as a strict alignment of all innovation activities with customers’ individual requirements in their competitive markets is crucial.”