A Merger in Wireless Chips for Ericsson, STMicro
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Ericsson and STMicroelectronics have agreed to join their wireless chip and software businesses to create a joint venture that will supply four of the world's top five mobile phone makers.
The new company, announced on Wednesday, will bring together the Mobile Platforms unit of Ericsson, the world's biggest mobile telecoms equipment maker, and ST-NXP wireless, the third-largest maker of wireless chips globally.
With pro-forma 2007 revenues or $3.6 billion, the venture will present a tougher challenge to wireless chip market leader Qualcomm (NASDAQ: QCOM) and No. 2 Texas Instruments (NYSE: TXN). Ericsson and ST-NXP Wireless already cooperate with one another.
"This is an interesting merger in that the new company will be a supplier to all the big mobile companies except Motorola (NYSE: MOT)," Redeye analyst Greger Johansson said.
The venture will build on ST's recent acquisition of Dutch chipmaker NXP's wireless unit, while allowing Ericsson to focus more on its core telecoms infrastructure business after a series of profit warnings as it battles fierce price competition.
"In a business where scale matters, the complementary product portfolios contributed by the parent companies will deliver significant scale and synergies," the two companies said in a joint statement.
ST currently has Nokia (NYSE: NOK), Samsung and Sony Ericsson -- Ericsson's mobile phones venture with Sony -- as customers, while Ericsson has LG Electronics, Sharp and Sony Ericsson.
Without Sharp, those customers, who also have other suppliers, account for 80 percent of all handset shipments.
The technologies of the new company will span second-generation, third-generation and future fourth-generation LTE mobile telecoms standards.
Sweden's Ericsson will pay STMicro $700 million, further boosting the cash pile of the Franco-Italian chipmaker, and will inject $400 million into the venture.
Before the deal closes, STMicro will buy back the 20 percent that privately held NXP still owns of the ST-NXP venture.
"Here they [Ericsson] are in an instant creating a business with a critical mass and a market-leading position within mobile platforms and at the same time focusing on the core operations," Cheuvreux analyst David Hallden said.
"This type of streamlining is of course positive, and I don't think we should rule out that we will see more of this."
Ericsson shares rose 0.6 percent to 65.90 Swedish crowns by 4:23 ET, while STMicro rose 2.2 percent to 8.28 euros.
The new unit will be 50-50 owned and based in Geneva, where STMicro is headquartered. Ericsson Chief Executive Carl-Henric Svanberg will be chairman of the board and ST's CEO Carlo Bozotti will be vice-chairman.
The new company will employ almost 8,000 people, about 5,000 from ST-NXP Wireless and roughly 3,000 from Ericsson.
A news conference is planned in London at 1100 GMT.