CHIPS: China Resources Joins Beijing’s Chip-Buying Campaign

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Bottom line: China Resources’ unsolicited bid for Fairchild Semiconductor is certain to fail, but reflects Beijing’s desire to broaden its field of domestic companies making bids for global microchip companies.

China Resources enters chip-buying race

Beijing’s recent bid to build up its high-tech microchip sector is in the headlines again, with word that state-run conglomerate China Resources has made an 11th-hour bid for mid-sized US chip company Fairchild Semiconductor (Nasdaq FCS). This particular bid, which would value Fairchild at nearly $2.5 billion, was quite a surprise, since Fairchild had agreed just last month to be acquired by US rival ON Semiconductor (Nasdaq: ON).

There are 2 major elements to this chip story that has seen China become a sudden major bidder for global assets. The biggest picture is a story of consolidation in the global sector, which is long overdue and comes as maturing technology and has created an intensely competitive field of mid-sized players, many of those losing money. The second element is Beijing’s own recent decision to join the field of global buyers, as it tries to build up a homegrown chip giant to compete with big global players like Taiwan’s TSMC (Taipei: 2330) and South Korea’s Samsung (Seoul: 005930).

Up until now, the Beijing-based Tsinghua Unigroup has emerged as China’s preferred vehicle for making global acquisitions, forming a major tie-up with Intel (Nasdaq: INTC), buying a stake in Western Digital (Nasdaq: WDC), and also making a failed bid for memory chip maker Micron (Nasdaq: MU). But this latest bid appears to show that Beijing doesn’t want to put all its microchips into one basket, and will let other big state-run firms also join the bidding for major global assets.

According to the latest reports, China Resources unsolicited bid offered $21.70 for each Fairchild share, topping ON’s previous offer of $20. (English article; Chinese article) The original deal had valued Fairchild at $2.4 billion, while the new one raises that to nearly $2.5 billion.

New ON Offer Coming?

Fairchild shares have jumped nearly 7 percent in the last 2 trading sessions to their latest close of $20.83, compared with previous levels that were slightly below ON’s $20 offer price. That means investors believe China Resources’ bid could stand a chance of success, or more likely that ON will be forced to raise its bid to a level closer to the new one from China Resources.

In this case I do expect that China Resources’ bid won’t be taken too seriously, as the company has little or no experience in the chip sector and has never done this kind of high-tech global M&A before. The group is one of China’s earliest major conglomerates, and is relatively well known for its Chinese supermarket chain and consumer-related products like beer. But those are quite different from microchips, and I’m frankly a bit surprised that Beijing has allowed China Resources to make this bid.

The offer comes as Beijing takes the lead at trying to build up a Chinese global contender in the high-tech chip space, after years of failed efforts at the more local level. A major plank of that strategy has been the recent global buying binge, which will give China access to key technologies it will need to build up its domestic sector.

Another plank in the build-up has been a welcoming of investment by big foreign players. In October Intel announced a massive $5.5 billion upgrade for its chip plant in the northeast city of Dalian (previous post), and earlier this week TSMC announced its own $3 billion plan for a cutting-edge factory in Nanjing. (previous post) This latest bid for Fairchild underscores Beijing’s determination to build up the sector, though I really do think the choice of China Resources as an acquirer is a bad one and will only leave many people scratching their heads.

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