SAN JOSE, Calif. -- In just one day alone, China's Semiconductor Manufacturing International Corp. (SMIC) suffered three major setbacks. On Tuesday (Nov. 10), it lost a big patent suit, its chief executive, and, in some respects, its independence.
What's next? Clearly, change is in the wind at silicon foundry vendor SMIC (Shanghai). Going forward, SMIC's newly-hired CEO must take swift action and restore customer confidence, bolster its bottom line and possibility change its overall strategy, according to analysts.
Observers believe SMIC will accelerate its 45-nm process R&D efforts, but it will possibly place its focus on fewer markets going forward. It is also likely that the company will end its reckless practice of building and managing fabs for others on a whim.
Another question remains clear: Now that Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) has gained a small stake in SMIC, will TSMC impose its will on SMIC? And over time, will TSMC buy SMIC--in an effort to expand into China?
Time will tell following a dramatic settlement between TSMC and SMIC. As reported on Tuesday, TSMC reached an out-of-court settlement in its bitter patent suit against SMIC, which clearly lost the case in dramatic fashion.
Under the terms, SMIC will pay TSMC $200 million plus SMIC stock and warrants. TSMC obtained 1,789,493,218 shares of SMIC, representing approximately 8 percent of SMIC. TSMC also obtained a warrant to subscribe for 695,914,030 shares of SMIC, which would allow TSMC to obtain total ownership of approximately 10 percent of SMIC.
TSMC has agreed to certain standstill, voting, and transfer restrictions for so long as they own any of the securities. TSMC will not be granted representation on SMIC's board and will not be involved in the day-to-day operations of SMIC. TSMC will vote its shares in favor of the actions recommended by SMIC's board.
Following the stunning settlement, Richard Chang, the founder and longtime CEO of SMIC, resigned. SMIC has appointed veteran industry executive David N.K. Wang to replace Chang. Some say Chang was ousted. ''I would hardly call this a resignation,'' according to one analyst.
Steven Pelayo, an analyst with HSBC, said the TSMC settlement could have a dramatic impact on SMIC. ''SMIC will pay $200 million. This is obviously much less than the rumors of (a) $1 billion (settlement),'' Pelayo said in a report.
''SMIC currently has about $450 million in cash and is cash flow positive this year and next, so we are not worried about the ability to survive,'' he said. ''Our greater near term concern remains the reactions of customers and suppliers, which may impact near term strength. We still like the turnaround story at SMIC, but admit we will need to get this issue behind us and hear 4Q '09 results (and) 1Q '10 guidance before the shares can work.''
Regarding the management changes, the news was viewed as positive. ''Shareholders have been very frustrated with SMIC's performance since IPO (in 2004), thus we believe the news will be interpreted positive,'' he said.
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