Paris — As Royal Philips Electronics moves ahead with its plan to spin off its semiconductor division, a surprising name has cropped up on analysts' lists of potential suitors: Intel Corp.

Industry matchmakers have also pegged Infineon Technologies AG and current Philips research partners Freescale Semiconductor Inc. and STMicroelectronics NV as suitable candidates for a merger or acquisition deal with Philips Semiconductors. But the arguments in favor of Intel are compelling.

An Intel-Philips deal would tie the world's largest producer of chips to one of the world's largest producers of consumer electronics. Intel would get systems-level insight into digital consumer applications--a sector it must attack vigorously if it does not want to lose chip market share to Samsung Electronics Co. Ltd. and Texas Instruments Inc., which Gartner Dataquest ranks second and third, respectively, behind Intel in the global chip rankings.

An Intel-Philips deal might also appeal to Philips Semiconductors' consumer electronics customers. "Let's face it, the X86 architecture is becoming dominant across the board in the consumer electronics market," ob- served one executive at a computer chip company. An Intel overture to Philips would be "a big plus for the CE industry," the executive added, asserting that Intel and Philips Semiconductors have "a shared vision" and that an alliance "could offer a long-term value proposition for shareholders of both companies."

But other realities argue against the pairing. Intel, already the world's No. 1 chip vendor, may not need to acquire Philips Semiconductors to gain access to design sockets that now go to Philips parts. And smaller chip companies like Infineon and Free- scale, faced with what many say is the likely prospect of industry consolidation, may be more amenable to a deal, approaching it from an "acquire or be acquired" perspective.

Intel's size does not render the company immune to industry pressures. Doug Freeman, senior analyst at American Technology Research, called the courtship talk "a distraction to In- tel" and its "turnaround efforts."

Malcolm Penn, founder and chief executive of Future Horizons, a U.K.-based research consultancy, called the pondered pairing "a high-risk marriage."

Intel would be "an interesting choice," said Alan Brown, research director at Gartner Inc. But he considers Infineon, ST and Freescale--in that order--safer bets.

Philips' options
As it looks to pull back from a division that it has increasingly struggled to finance, Royal Philips Electronics has three options: sell off the semiconductor unit outright; seek a merger with a chip company of a similar size to Philips Semiconductors, thereby reducing its stake in the business; or sell a percentage to institutional investors by way of an IPO.

The parent company has a responsibility to shareholders to examine the value in all three propositions. But it might prefer the latter two, which would let it continue to exert some influence over the chip operation while gradually dialing down its financial commitment.

If Philips does go the merger/acquisition route and hooks up with Intel, Philips Semiconductors could help the microprocessor giant in its thus-far-unfulfilled quest to entrench itself in the cellular handset and consumer electronics markets.

While Intel has made progress with RF CMOS in its Hillsboro, Ore., facility, it remains behind in RF. Its Centrino Wi-Fi platform has met with success and today uses Intel silicon, but the original design used a Philips RF front end. Similarly, Intel is pushing the WiMax and WiMedia wireless efforts but has yet to develop RF silicon for those standards.

"Intel has had a lot of trouble gaining traction in cellular," said Doug Grant, business development manager at analog and RF house Analog Devices Inc. (Norwood, Mass.). "They've had grand goals but keep coming up short."

Philips executives said the semiconductor unit's Nexperia-based solutions for UMTS, GSM, GPRS and Edge have been used in Philips phones and in equipment from Alcatel, Arima Group, Bird, Cellon, Ericsson, Haier, Nokia, Samsung, Siemens and Sony Ericsson. Philips' DVB-H-based TV-on-mobile solution has garnered design wins with "three out of the top six mobile-phone manufacturers," said Gertjan Kaat, Philips Semiconductors' senior vice president for the mobile and personal businesses. Philips offerings run the gamut from ultralow-cost handset solutions to mass-market 3G silicon and high-end, feature phone multimedia processors. The latter devices have scored three tier-one OEM design wins, the company said.

But ADI's Grant said he suspects Philips may be losing ground in cellular. "We don't see them as much anymore," he said. "They had a lot of traction but have since lost that in handsets, though they're doing some custom work."

With Philips Semiconductors likely valued at anywhere between $5 billion and $6 billion, according to analysts, Intel's deep pockets would stand it in good stead. Intel CEO Paul Otellini has previously expressed openness to a large acquisition if the right opportunity were to present itself.

Meanwhile, Philips' executives have observed that an intercontinental deal would enhance geographical and sales diversity--another factor that may favor Intel. In a recent interview with EE Times (Jan. 16, page 22), Frans van Houten, CEO of Philips Semiconductors, cited Renesas Technology Corp., the merger of chip divisions from Hitachi and Mitsubishi, as a successful chip-industry marriage, but added: "If they really wanted to grow big--go for scale--they should have merged with a non-Japanese player in the semiconductor market."

At a news conference here last week, STMicroelectronics president and CEO Carlo Bozotti also touted geographical diversity, citing ST's preference for exploring non-European markets as a reason ST may be disinclined to merge with fellow European Philips.

Conventional business management wisdom, however, tends not to favor intercontinental marriages. In a recent report by Accenture on "How to Build Value in a Merger," authors Walter Shill and David Mackenzie note that the most underappreciated issue in mergers is "managing culture clash."

"Cultural differences are re- sponsible for undermining pros- pects for value creation and, in some cases, compelling buyers to unwind deals that once held so much promise," the authors caution. "These cultural differences are systematically underweighted in pre-deal analysis. In one well-known merger between two high-tech manufacturers, senior exec- utives claimed that the post-merger financial picture was not as strong as expected, because they had underestimated the 'junior' partner's highly esteemed culture."