Royal Philips Electronics has revealed that it plans to spin out its $5.7 billion-a-year semiconductor operation. Philips is likely to merge the business with another chipmaker and thus take part in what the company sees as the inevitable consolidation of the industry.
Philips has announced that it will create a separate legal structure for its semiconductors unit.
CEO Gerard Kleisterlee has refused to comment on whether discussions with potential buyers are already underway. But by putting itself in play, Philips may well act as a catalyst for merger talks among the many mid-range players desperate to acquire the scale necessary to provide the innovations that drive the industry.
According to rankings compiled by iSuppli, Philips is the eighth largest chipmaker with a 2.4% market share, among many others with a similar lowly ranking. Only the big three – Intel, Samsung Electronics, and Texas Instruments – can boast a market share of more than 4%.
Philips is clearly looking for an exit strategy for its semiconductor operation, fearing the cyclical nature of the business will conflict with its desire to become a more predictable company, focusing on the healthcare, lifestyle and technology sectors.
A business renewal program is already underway to improve the division’s competitiveness, with a target of achieving margins between 5% and 10% over the industry’s cycle. Philips’ chip operation caters for the consumer, communications, computing, and automotive industries, and any merger will be designed to achieve its ambition to be the first or second player in each category.
Philips will not rule out any options at this stage, so it could go for a trade sale or an IPO. But a more likely option is a merger with a quoted company, and Germany-based Infineon Technologies, the industry’s sixth largest player, looks a likely candidate. Both companies have a similar history because Infineon was spun out of conglomerate Siemens, fretting at its cyclical performance. Ironically, Infineon has itself agreed to spin out its memory business, the most cyclical sector of its operations.