Taiwan's UMC pursues China's He Jian

The board of Taiwan's United Microelectronics Corporation (UMC) yesterday agreed to approach shareholders for approval of an acquisition of the holding company of He Jian Technology (Suzhou). He Jian's shareholders, representing 85% of the issued equity, will be offered $285 million in cash or an equivalent value of UMC common stock or American depositary shares. A 15% stake in He Jian, which is lying in escrow for UMC, is not included in the valuation.

He Jian is closely held and no details were available either of its shareholding structure or the debt on its books. A semiconductor foundry that started business in 2001, it operates an 8-inch fab in Suzhou in China with a monthly capacity of 41,000 wafers. He Jian was profitable from 2005 to 2007.

UMC was Taiwan's first semiconductor company, founded in 1980. It employs around 12,000 people globally and has sales and customer service offices in Taiwan, Japan, Singapore, Europe, and the United States.

"To facilitate UMC's global business reach beyond its current markets, to help expedite business growth, to increase profitability, to enhance shareholder value and to increase UMC's business competitiveness, UMC believes that a production base in China is key," said UMC in a written statement announcing the deal.

UMC has been affected by the downturn currently plaguing the semiconductor industry and posted a larger-than-expected net loss of NT$8.16 billion ($242 million) for the first quarter of 2009.

China has weathered this downturn better than many other regions and this has driven the decision to pursue the takeover of He Jian, UMC said. It added that it had considered the option of setting up a new fab which would have taken more than a year and required more management time and financial capital. Its decision to buy He Jian instead addresses these issues and will also allow UMC to realise the 15% stake it has in the company.

UMC and He Jian have a relationship that dates back to 2001 when He Jian was founded. Some of its founders were ex-UMC employees, which led to allegations in Taiwan that UMC had illegally shared technology with He Jian.

UMC maintained that it did not provide the Chinese company with any proprietary technology but was given an equity stake of 15% as compensation for management assistance it provided to the new foundry. But in January 2006, after UMC chairman Bob Tsao and vice-chairman John Hsuan resigned from the UMC board, both were charged with criminal offenses in connection with He Jian and UMC was fined for violations of the Act Governing Relations Between Peoples of the Taiwan Area and the Mainland Area.

"UMC believes that the indictment of Bob Tsao and John Hsuan is of a purely political nature and caused by the special nature of the relationship between Taiwan and Mainland China," UMC said in a written statement at the time.

A District Court found both not guilty in October 2007, but the Taiwan prosecutor's office filed an appeal in November. In December 2008 the Taiwan High Court rejected the prosecutor's appeal, and on January 20 this year, the prosecutor's office filed another appeal to the Supreme Court which is still pending.

UMC is advised by Nomura. The target company was advised by UBS.

Completion of the acquisition is conditional upon approvals from both governments, including anti-trust regulators in China and Taiwan's Investment Commission.

"Although UMC and He Jian have agreed in the agreement governing the acquisition to use their commercially reasonable efforts to obtain the requisite governmental approvals, there can be no assurance that these approvals will be obtained," said UMC in a New York Stock Exchange filing, highlighting risk factors to the deal. "In addition, the governmental authorities from which these approvals are required may impose conditions on the completion of the acquisition or require changes to the terms of the acquisition."

"The laws regarding a deal such as this have not yet changed but the atmosphere has changed," says a specialist, commenting on UMC's decision to announce the deal even though there is no clarity on when regulations will permit it. What is clear is that UMC is taking all necessary steps to ensure that it can proceed with this deal as soon as circumstances allow.

Markets endorsed the He Jian plan, sending UMC's share price 14% higher to $3 in early New York trading yesterday.