Money Matters - Simplified

Abu Dhabi’s ATIC to buy Chartered for $2.5bn

As Chartered and ATIC intend to merge, analysts do not expect many job cuts with the companies themselves claiming that they are not expecting many redundancies

Singapore, September 7 -- Abu Dhabi, through its investment company, Advanced Technology Investment Co (ATIC), has agreed to buy Singapore’s state-controlled Chartered Semiconductor Manufacturing Ltd (NASDAQ:CHRT) for a sum of $2.5 billion.

The deal is backed by Chartered’s largest shareholder, Singapore’s Temasek Holdings Pte. According to the deal, ATIC will pay $2.68 a share in cash to Chartered. The amount is two Singapore cents higher than the chipmaker’s closing price on Sept. 4.

The announcement of the deal puts to rest the speculation that Temasek intends to sell its investment in Chartered.

Manjesh Verma, an analyst at Nomura Holdings In. opined, “From a credit perspective, Chartered will continue to benefit from a strong parent, given the support from the AA rated Abu Dhabi government backing the company.”

A behemoth in the making
ATIC intends to combine Chartered, which makes chips for Microsoft Corp.'s (NASDAQ:MSFT) Xbox 360 game console, with Global foundries Inc. ATIC had started Globalfoundries last year in an alliance with Advanced Micro Devices Inc. (NYSE:AMD)

The amalgamation of Globalfoundries and Chartered may well create a challenger to the leaders like Taiwan Semiconductor Manufacturing Company Limited (TSMC) (NYSE: TSN, LSE: TMSD) and United Microelectronics Corp (UMC) (NYSE: UMC) in the chip foundry market.

Put together, TSMC and UMC hold close to two-thirds of the market share in the $20 billion market.

HSBC’s Pelayo noted, “Had Globalfoundries not done this it would have taken another one to two years for them to ramp up their capacity and expand their customer base to prove they could be a threat. Now the threat starts today.”

Doug Grose, the present Chief Executive Officer of Globalfoundries will be at the helm of the combined operations, while Chia Song Hwee, the present CEO of ATIC will assume the role of chief operating officer in the combined entity.

Consolidation on expected lines
Akin to most other industries, semiconductor manufacturers have had to bear the brunt of the worst ever worldwide recession since the Great Depression of the 1930’s.

Analysts, during the last one year, have averred that an obvious outcome of such a downturn is that the big fish will eat the small ones. As such, the stronger, bigger players having deep pockets will buy out weaker opponents.

Not only will this exercise boost the market share of the bigger players, it will also help to reduce the cycle of oversupply.

Steven Pelayo, an analyst at HSBC Holdings Plc in Hong Kong said of the agreement, “This deal makes a lot of sense. This presents a formidable threat to other players and really does start to change the competitive landscape much more quickly than I thought.”