Infineon Philips Semiconductors AG - Strategic Fit of a Merger

Table of Contents

1 Executive Summary

2 Introduction

3 Infineon Technologies AG
3.1 Company Profile
3.2 Company Ownership
3.3 SWOT Analysis

4 Philips Semiconductors

5 Market and Industry Profile
5.1 Remote Environment
5.2 Competitive Environment
5.3 Market Outlook

6 Reasons for the Merger

7 Infineon Philips Semiconductors AG (IPS)
7.1 Ownership
7.2 Strategy (Porter’s Generic Strategies)
7.3 Organisational Structure

8 Appendices
8.1 SWOT-Analysis - Strength
8.2 Porter’s Five Forces – Theory
8.3 Porter’s Five Forces – Further Forces
8.4 Porter’s Generic Strategies
8.5 Ansoff Matrix (by Igor Ansoff)

9 Bibliography

Figures and Tables

Figure 1: Shareholders Infineon Technologies AG

Figure 2: Sales per Sector, Koninklijke Philips Electronics

Figure 3: Porter’s Five Forces

Figure 4: Leading Buyers of Chips

Figure 5: Global Semiconductors Market Value Forecast 2001 - 2010

Figure 6: Global Semiconductors Market Segmentation

Figure 7: Ansoff’s Growth Matrix

Figure 8: Sales by Region 2005

Figure 9: Sales by Market Segments 2005

Figure 10: Geert Hofstede’s Value Dimensions

Figure 11: Porter’s Generic Strategies

Figure 12: Global Product Division Structure

Table 1: Revenues and Market Share before Merger

Table 2: Revenues and Market Share after Merger

List of Abbreviations

AG Aktiengesellschaft (Public Limited Company)

AIM Automotive, Industrial and Multimarket, Business Segment, Infineon Technologies AG

ASEAN SouthEast Asian Nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam)

CAGR Compound Annual Growth Rate

CEO Chief Executive Officer

COM Communication Solutions, Business Segment, Infineon Technologies AG

DAX Deutscher Aktienindex (German Share Index)

DRAM Dynamic Random Access Memory (Memory Chips)

EBIT Earnings before Interest and Taxes

GPRS General Packet Radio Service

GSM Global System for Mobile Communications

IP Intellectual Property

IPS Infineon Philips Semiconductors

MNE Multinational Enterprise

MP Memory Products, Business Segment, Infineon Technologies AG

PEST Political, Economic, Socio-Cultural and Technological Factors (Remote Environment)

R&D Research and Development

UMTS Universal Mobile Telecommunications System

1 Executive Summary

As a result of the merger between Infineon Technologies AG and Philips Semiconductors, Infineon Philips Semiconductors AG (IPS) will rank third amongst the world’s largest manufacturers of semiconductors, with 5.9% of total sales. Infineon will gain access to Philips’ customer base which demands profitable chips for consumer electronics and mobile solutions. Its presence in the growing markets of Asia will be strengthened. By merging the two companies, a strategic fit will be achieved in terms of geographic market penetration and market sectors. Furthermore, the size of IPS will streamline efficiency and secure the long-term survival in a highly-competitive market with intensifying pressures from Asian manufacturers. Another objective is to combine both companies’ competencies in order to develop smaller wafers and to conduct research on nanotechnology. The strengthened capital basis enables IPS to enlarge investments in R&D and production facilities. Major shareholders of IPS will be Siemens AG and the Philips Group.

2 Introduction

This report analyses the prospects and the potential of a merger between Infineon Technologies AG (Infineon) and Philips Semiconductors and is directed to the shareholders of Infineon. Chapter 3 and 4 provide a background of the two companies. Chapter 5 explores their market and industry. Chapter 6 highlights the reasons for the merger based on previous chapters. Ownership, strategy and structure of the Infineon Philips Semiconductors AG are described in Chapter 7.

3 Infineon Technologies AG

3.1 Company Profile

Infineon, the former semiconductor division of the German Siemens AG, and was separated in April 1999. Infineon employs 36,400 employees worldwide of which 7,400 people are involved in R&D.^[1]

The company is divided into the following three business segments:

- Automotive, Industrial and Multimarket (AIM)
- Communication Solutions (COM)
- Memory Products (MP)

Infineon develops, manufactures, and markets semiconductors and systems solutions for wireless and wire line communications, automotive, industrial, computer, security and chip-card markets.^[2]

According to company plans, the loss-making Memory Product division will be dispersed in 2006 due to its earnings volatility. Infineon wants to concentrate on the more profitable and stable two business segments which remain. However, analysts argue that these plans may fail because of the low price which will be generated.^[3]

In the financial year 2005 Infineon achieved sales of €6,76bn. The EBIT loss was €183m.

3.2 Company Ownership

Infineon Technologies AG is listed on the DAX 30 index of the Frankfurt Stock Exchange and on the New York Stock Exchange. Siemens AG holds 18.23% of the shares and is the largest single shareholder. 71.77% of Infineon shares are free float shareholdings with no single share larger than 5% (Figure 1).^[4]

illustration not visible in this excerpt

Figure 1: Shareholders Infineon Technologies AG

(Source: Infineon, 2006c)

3.3 SWOT Analysis

Weaknesses, opportunities, and threats are explored in more detail in the following section. The major strengths are discussed in Appendix 8.1.

Weaknesses

Siemens AG was Infineon’s largest customer in 2004. It was mainly logic chips that were sold to Siemens and constituted over 13% of Infineon’s total sales. Another major customer is BenQ which has lost significant market share in recent years.^[5] Through Infineon’s over-dependence on two single customers, it risks a negative impact.

Since 2002, Infineon’s cash balance has declined substantially and the current ratio has decreased from 2.4 in 2003 to 1.8 in 2004.^[6] According to analysts, Infineon’s cash of €2.4bn will last until 2006 if the recession in the chip industry continues.^[7]

Opportunities

Infineon has a strong position in the mobile-phone, infrastructure-equipment, and Bluetooth-chipset markets which will all experience rapid growth over the next few years.^[8] Moreover, demand for NAND chips, those integrated in digital cameras and MP3-Players, in particular in Apple’s iPod, will increase at a CAGR of 32% until 2009, according to the market research institute iSuppli. NAND-chips are more profitable than DRAMs which are installed in computers.^[9] Demand in Asia and Latin America will increase which should lead to higher sales of semiconductors (see Chapter 5.3).^[10]

Threats

The competition from Asian manufactures is intensifying. Companies from Taiwan, Korea and China offer high-quality products at low prices. Chinese manufacturers increased their revenues by 87% in 2004 and constitute a major threat for the global semiconductor market.^[11]

4 Philips Semiconductors

Philips Semiconductors is a business division of Koninklijke Philips Electronics and has its headquarters in Eindhoven.^[12] It generates approximately 17% of group sales (Figure 2). The company employs more than 35,000 people and 6,000 employees are working in R&D activities. Philips Semiconductors generated sales of €4.6bn and EBIT of €307m in 2005.^[13] It has 20 manufacturing and assembly sites and sales organisations in 60 countries.^[14]

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Figure 2: Sales per Sector, Koninklijke Philips Electronics

(Source: Philips, 2006b)

The company is divided into four business units (Automotive and Identification, Mobile and Personal, Home and Multimarket)^[15] and manufactures semiconductors for connectivity-applications, communications, automotive and computing markets. One of its major products is Nexperia, a ‘system-on-a-chip’ platform of programmable integrated circuits for multimedia applications.^[16] Nexperia is necessary for UMTS, GSM and GPRS standards and is integrated in mobile phones from Philips, Alcatel, Nokia, Samsung, Siemens and Sony Ericsson.

According to Kleisterlee, President and CEO of Philips; and van Houten, CEO of Philips Semiconductors, the latter will be dispersed.^[17] The Philips Group is unable to make necessary R&D investments in all of its product divisions. Therefore, the company is looking for a strong partner for Philips Semiconductors.^[18]

5 Market and Industry Profile

The external environment can be analysed with two different tools. The PEST analysis is used to identify the influences of the remote environment. Porter’s Five Forces, however, deals with competitive environment.

5.1 Remote Environment

The PEST analysis is used to assess the factors which have long-term influence on the environment.

Political Factors

- Reducing trade barriers between countries facilitates trade and constitutes an opportunity to enter new markets
- Enlargement of the European Union
- China opens up its huge market for MNEs
- More free-trade agreements especially among ASEAN countries
- Investment incentives offered by host governments for locating R&D in ASEAN countries

Economic Factors

- Increasing consumer-spending power and rising demand in several markets especially in China, India and in the ASEAN countries^[19]
- Current slow economic upturn should lead to increasing replacement expenditures in computer and network systems. This should increase sales and prices for DRAMs.

Socio-Cultural Factors

- Demand for electronic products such as mobile phones, Xbox or Playstation increases drastically especially among young people.
- Electronic products become fashion products. This development raises the demand for semiconductors.
- Payments by credit cards or via Internet increase demand for security chips.

Technological Factors

- Fast technological development makes innovation and production of cutting-edge technologies indispensable
- Increasing number of electronic devices in vehicles create new markets for semiconductors
- Structure sizes on wafers decrease in order for efficiency to increase. This development increases demand for Nanotechnology which requires huge investments in R&D and thus demands a skilled workforce

5.2 Competitive Environment

According to Porter, a competitive environment consists of five forces which determine the competition within an industry^[20]. Porter’s Five Forces are illustrated in Figure 3. However, only the most significant forces will be explored herein. The others are explained in Appendix 8.3. For further theoretical information see Appendix 8.2.

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Figure 3: Porter’s Five Forces

(Source: Pennsylvania State University, 2005)

Bargaining Power of Buyers

In general, buyers’ bargaining power is high because main customers are large-scale MNEs such as Hewlett Packard, Dell Computer and Nokia (Figure 4). These companies are powerful and place large orders. However, semiconductor manufacturers and customers often work closely together to develop components which adapt to customer needs and fulfil specific requirements. Alliances are based on long-term contracts and therefore, buyers’ power is limited in the short-term because they cannot switch suppliers. There is little risk of backward integration due to large entry barriers.

illustration not visible in this excerpt

Figure 4: Leading Buyers of Chips

(Source: Isuppli, 2006a)

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^[1] Infineon, 2006a

^[2] Datamonitor, 2005c, p. 9

^[3] Fromm, 2006a, p. 4

^[4] Infineon, 2006c

^[5] Fromm, 2006b, p. 4

^[6] Datamonitor, 2005a, p. 23

^[7] Müller, 2005, pp. 82-90

^[8] Datamonitor, 2005a, pp. 23-24

^[9] AFX News Limited, 2006

^[10] Datamonitor, 2005a, pp. 23-24

^[11] op.cit. 24-25

^[12] Datamonitor, 2005b, p. 4

^[13] Philips, 2006b

^[14] Philips, 2006a

^[15] EE Times, 2005a

^[16] Datamonitor, 2005b, p. 6

^[17] EE Times, 2005b

^[18] EE Times, 2005c

^[19] Datamonitor, 2005c, p. 8

^[20] Brooks and Weatherston, 2000, p. 63