Micron move scares Hynix investors.

Byline: The Register-Guard

Even as it announced that it was buying a U.S. memory-chip factory from Toshiba Corp., Boise-based Micron Technology Inc. on Tuesday said it continues to examine a potential alliance with Hynix Semiconductor Inc.

But the news that Micron plans to buy Toshiba's Dominion Semiconductor plant in Manassas, Va., sent Hynix's share price plunging on the South Korean stock exchange.

Investors figured that any deal between Micron and Toshiba lessens the likelihood that Micron will also want to do a deal with Hynix.

Some analysts said Micron's only possible interest in Hynix now is Hynix's west Eugene plant, which Hynix is converting to produce 256-megabit dynamic random access memory, or DRAM, chips, the emerging industry standard.

Such a plant may fit well with Micron's immediate needs, said Andrew Norwood, a semiconductor analyst with Gartner Dataquest of Stamford, Conn. ``It's hard to see what else Micron could get out of a deal with Hynix,'' he said. In addition to the Eugene plant, Hynix has 12 chip plants in Korea, some making memory chips, some making non-memory chips. Memory chips are primarily used in personal computers.

The surprise Micron-Toshiba announcement shows how unpredictable the memory chip industry has become. The global market is glutted by excess chip capacity and poor demand, leaving chip prices at far below the cost of production. Chip companies are grappling to adapt.

In agreeing to sell its Virginia plant for an undisclosed sum, Tokyo-based Toshiba said it is turning away from the commodity memory chip business. Instead, the company said it will focus on producing custom-designed chips, where profit margins are higher. Toshiba also is considering phasing out production of DRAM chips in Japan by next June.

Sean Mahoney, a spokesman for Micron, said the Toshiba deal "fits well with our plans for continuing to reduce our cost-per-bit production expenses through efficiencies in scale.'' In the meantime, he added, Micron's "due diligence'' talks with Hynix continue.

Hynix shares on Tuesday fell by the 15 percent daily limit, their worst one-day loss since Sept. 17.

``Investors overreacted today,'' said Koo Hee Jin, a semiconductor analyst at LG Investment & Securities Co. in Seoul. ``This is a part of efforts among chipmakers to help restore the balance between supply and demand in the market.''

Hynix CEO Park Chong Sup and a team of his negotiators left Tuesday for the United States to continue talks with Micron, said Kim Seung Soo, a Hynix spokesman.

Burdened with $6.7 billion in debt, Hynix is seeking ways to stay afloat and continue making loan payments as well as upgrade its factories. One estimate by UBS Warburg forecasts that Hynix will need a new infusion of money by the second quarter of next year.

To raise cash, Hynix is considering selling some of its plants, including the Eugene facility, Korean officials have said.

Many of the former leaders in the memory-chip field, including most of the Japanese manufacturers who dominated it in the 1980s and 1990s, have given up trying to slash their labor and material costs deeply enough to make a profit. Toshiba follows Hitachi, NEC, Fujitsu and others in backing away from commodity chips.

Low-cost producers such as Micron - the world's No. 2 memory chip producer - are moving to pick up plants inexpensively from departing rivals. Micron's interest in building up its share of the DRAM market ``allowed us to quickly close a deal,'' said Takeshi Nakagawa, head of Toshiba's semiconductor operations.

The Virginia plant produces 3.25 million units a month of 128-megabit-equivalent DRAM chips. Dominion Semiconductor was created in a 1995 joint venture with International Business Machines Corp. Toshiba bought IBM's share in 1999 as IBM exited the business.

By increasing its production and market share, Micron can better control chip prices, analysts said.

``They can control more capacity, then they can decide how much they want to take out of service, or they'll have it for the next up cycle,'' said Alan Loewenstein, a money manager with the John Hancock Global Technology Fund. ``It helps pricing.''

Toshiba said the DRAM market is tough. ``The volatility of DRAM prices is extraordinary," Toshiba President Tadashi Okamura said.