Infineon Technologies, ON Semiconductor, and TriMedia Technologies: are the megalithic chip companies of yesteryear destined to become the streamlined spinoffs of tomorrow?
Possibly, say analysts, who regard the semiconductor industry's ongoing mitosis as an indication that shareholders looking to maximize value are demanding greater focus from their investments. In some respects, the spate of spinoffs reflects the lingering effects of the IC market's 1998 downturn, during which most companies trimmed capital spending, sold corporate divisions, or shed product lines in an effort to cut costs.
Last week, Philips Electronics NV said it would spin off its TriMedia line into Tri-Media Technologies in order to present a "neutral" method of licensing the company's family of media-processor cores. Reports also resurfaced that Hitachi Ltd. is considering the same strategy for its SH embedded-processor line, as the company had first indicated last summer. "We have not yet determined our approach to handling" the business, an Hitachi spokesman in Toyko said last week. He added that spinning off the business is one of several options the company is looking at. Other options include striking industry alliances and continuing to license the processor technology, he said.
In addition, multimedia supplier S3 Inc., Santa Clara, Calif., said it, too, is considering the spinoff or sale of its chip business to what sources have identified as Via Technologies Inc.
And last week's decision by investors to return disk-drive maker Seagate Technologies Inc. to private hands reflected a broader move by companies to return to their roots, as Seagate traded investments in companies like Veritas Software Corp. and Gadzoox Networks Inc. for a concentration on its core storage business (see related story on page 4).
Analysts look for the trend to continue. "I think what we're seeing in terms of spinoffs is an emphasis on corporate focus, and then to maximize valuations," said Mark Edelstone, an analyst at Morgan Stanley Dean Witter & Co., San Francisco. "As a result, I think that it's going to continue, driven by the strategic moves of companies like Motorola and ON Semiconductor and Siemens and Infineon."
S3's focus: not its chip business?
Of the three companies tapped to be spun off last week, the uncertainty surrounding S3's chip business was highlighted by a need to hone the company's market direction. Since buying Diamond Multimedia Inc. last June in a $128 million stock swap, S3's core graphics business has been overshadowed by retail products like the Diamond Rio consumer MP3 player.
"S3's not a graphics company anymore," Edelstone said.
That market reality may cause S3 to jettison its chip business altogether, rather than maintain a stake in it, according to observers. Indeed, S3's management could make an argument that graphics chips are the weakest part of the company's business.
"In the graphics business, it's tough to have a positive [profit and loss statement]," said Dean McCarron, an analyst at Mercury Research Inc., Scottsdale, Ariz. "If you look at the typical 'hockey stick' of the Internet stocks, graphics chips [companies] are already at the top of the hockey stick."
A week ago, sources at S3 reported that management had leaked word that the Multimedia Division-the chip business and related add-on cards sold under the Diamond Multimedia name-had been sold to Via Technologies, a Taiwan-based chipset manufacturer. Via is also S3's partner in S3-Via Inc., a joint venture that builds integrated graphics chipsets.
"Via would certainly be the leading candidate," said Jon Peddie, an analyst at Jon Peddie Associates, Tiburon, Calif.
A day later, however, sources said that the deal had been called off, although negotiations between the companies continue. Calls to S3, including to Paul Franklin, president of the Multimedia Division, and Kenneth Potashner, S3's president and chief executive, were not returned.
A spokesman for Via responded in an e-mail that the company could neither confirm nor deny information that Via has made a bid for S3's chip business.
S3 rival Nvidia Corp., Santa Clara, was also rumored to be a candidate to purchase the chip business, although the company has denied that it engaged in any such talks. "We're not currently in discussions with S3 about an acquisition of their graphics business," said Chris Hoberg, Nvidia's chief financial officer.
Sources said additional parties were also vying for S3's IC operations, although the identities of the bidders were not known.
Separating IP provider from competitor
While S3's graphics-IC business has struggled since falling from the market's lead spot several years ago, Philips and Hitachi have viewed their respective embedded cores as their crown jewels.
By spinning off the divisions into separate entities dedicated to marketing, licensing, or selling the cores outright, the companies are following the lead of ARM Ltd. and MIPS Technologies Inc., the latter of which was spun off from Silicon Graphics Inc.
As earlier reported by EBN, the Tri-media Technologies spinoff has received investments from Philips and Sony Corp. While the exact amount was not disclosed, Philips' capital stake is about three times as large as Sony's, said Cees Hartgring, vice president and general manager of the TriMedia business line at Philips Semiconductors, Sunnyvale, Calif.
While the new company has named no executive team or base of operations, the deal is expected to be completed by the end of April and will open its doors with 70 employees.
The impetus for TriMedia Technologies was to create a neutral IP licensing house similar to the model used by MIPS and ARM, allowing Philips and other licensees to sell TriMedia chips directly to OEMs, Hartgring said. Hitachi is also reportedly mulling a similar spinoff and licensing model for its embedded SH microprocessor, as reported by EBN last June.
"All other companies are currently doing research on embedded VLIW processors, which is extremely inefficient," Hartgring said. "All of those companies had expressed interest in licensing our technology, but were hesitant to license technology from a company that was also a key competitor."
Under the new model, Philips and Sony will license the TriMedia architecture, cores, and supporting tool and development environment, while TriMedia will target other "networked digital television" and consumer-electronics companies as potential licensees.
"Our core focus is the networked digital television ... which will be a box with a big [data] pipe coming into the home," Hartgring said.