The announcement, made early Monday (Dec. 3) in Seoul, South Korea, is a dramatic turn of events for the DRAM industry, which is wracked by overcapacity and with leading players unwilling to cut back production. A statement released by both companies said they were beginning exploratory discussions on "a broad array of strategic options" that could "maximize" Hynix's "stakeholder value." Later in the day, Hynix chief executive officer C.S. Park told reporters that "within a month, we will know whether a merger is possible."

Just last Friday (Nov. 30), Hynix denied reports that it was in talks with Micron. Korean media reported that Micron chief executive officer Steve Appleton had visited Seoul to assess a potential link-up, which could include a merger, asset sales or Micron buying a stake in Hynix from its creditors. On Monday, a Micron spokesman said "everything is on the table," according to a Reuters report.

With DRAM prices having dropped more than 80 percent over the last year, top manufacturers say they are losing money on every commodity chip they make. Last quarter, Samsung's semiconductor division lost $292 million, Micron lost $576 million and Infineon Technologies lost about $536 million. Hynix fared worst, falling $1.2 billion in the red. Overall, DRAM industry revenue is expected to drop by more than 45 percent this year.

Consequently, DRAM companies have been looking into mergers — Toshiba Corp. and Infineon are rumored to be in discussions — or are slowly withdrawing from the DRAM business, as is the case with Winbond Electronics Corp. in Taiwan. But an alliance or merger between Micron, with over $1 billion in its war chest, and Hynix, saddled with nearly seven times that amount of debt, left observers wondering what the upside of such a deal would be for Micron.

"Buying some of Hynix might be a good way to stabilize Hynix's stock price . . . but apart from that I can't see an outstanding reason for them to get together," said Soo Kyoum Kim, a South Korea-based memory analyst for International Data Corp. "Technically speaking, I find it hard to see what the major benefit for Micron would be."

Center of controversy

Hynix has long been at the center of a dispute in the volatile DRAM industry, with criticism mounting over multibillion dollar bailouts by creditors, which include government-sponsored banks. In an effort to raise cash and push forward with technology investment, the company is stripping away its non-core businesses, such as a TFT-LCD division that was sold to Taiwan's Cando Corp. Hynix is also hoping to sell off older fabrication facilities, including two capable of supporting 0.35-micron and greater process technologies, to Shougang Steel, China's third largest steelmaker, for about $750 million.

One possible reason Micron may invest in Hynix would be to prevent the company from flooding the market with product next spring should it face yet another liquidity crisis, Kim said. Investing in Hynix through equity swaps would minimize future stock overhang and could also involve a fire-sale acquisition of Hynix's only U.S.-based 200-mm wafer fab in Oregon, which is near to completing refurbishment after six months of downtime, said Sun Chung, a semiconductor analyst at Merrill Lynch in South Korea.

But the last thing Micron needs is more 200-mm wafer capacity in today's supply saturated market, analysts said, especially when it is planning to open a 300-mm wafer fab in 2004. "The real thing he Appleton is trying to do is eliminate a competitor, because Hynix has been the biggest problem by trashing prices all year because they are willing to sell below variable cost," said Dan Hutcheson, president of VLSI Research. "They'll probably get it for a song and then shut it down."

Another possibility bandied about includes Micron keeping some of the newer fabs open, but "the No.1 challenge would be getting those plants upgraded and making them cost competitive," said Dan Heyler, director of Asia Pacific Semiconductor Research for Merrill Lynch. "On top of that is the balance sheet and debt issues. It would be a challenging integration."