PARIS/LONDON – Ericsson and STMicroelectronics have agreed to combine their wireless chip and software businesses, strengthening their hand against competitors to supply the likes of top cellphone maker Nokia.
The new company will command pro-forma sales of $3.6 billion in current and future mobile telephony technology to rival that of Qualcomm and supply four of the world's five leading handset makers.
“This is a move for leadership,” STMicro Chief Executive Carlo Bozotti told journalists and analysts at a conference in London on Wednesday.
Ericsson CEO Carl-Henric Svanberg said: “On our own... we cannot provide a complete offering. We also want to see that we can provide critical mass and scale.”
Shares in Franco-Italian chipmaker STMicro, which just months ago merged its wireless business with that of NXP of the Netherlands, rose 2.43 percent to 8.30 euros at the close.
Shares in Ericsson, the world's biggest mobile telecoms infrastructure maker, rose 0.5 percent to 65.80 Swedish crowns.
STMicro, which will have to buy the remaining 20 percent of the ST-NXP venture before completing the deal with Ericsson, will contribute $1.2 billion in assets to the joint venture, which will be based in Geneva and have about 8,000 staff.
It will receive $700 million in cash from Ericsson, and Ericsson will put a further $400 million cash into the venture, which will outsource all its production.
Bozotti said STMicro would pay “substantially below” $700 million to buy out NXP, and said the deal would be net cash flow positive and would enhance profitability.
Svanberg said the deal would be earnings neutral in the short term and positive over the long term.
Both parties acknowledged the complexity of the merger – which will bring together French, Italian, Dutch and Swedish components – especially so soon after the ST-NXP deal.
BALANCE OF POWER
In an interview with Reuters Television, Bozotti said most of the cost synergies of the deal would come from the ongoing integration of STMicro and NXP's wireless businesses, which he reiterated would be in the hundreds of millions of dollars.
He declined to say what further savings might be extracted from the deal with Ericsson, and refused to rule out job cuts, although he said the two businesses were mainly complementary.
STMicro last year struck a deal with Nokia to supply third-generation chipsets – used in advanced mobile phones capable of video and picture transfer and Web browsing.
The deal tipped the balance of power away from Texas Instruments, whose biggest customer was Nokia, and from Qualcomm, the world's leading maker of wireless chips.
ST will now add cutting-edge HSPA and future-generation LTE technologies to its portfolio through the Ericsson venture, making the chance of one of its rivals regaining the upper hand more remote.
“It strengthens their hand against a potential scenario of Nokia using Qualcomm solutions,” noted one equity analyst who works for a large institutional shareholder of STMicro, declining to be named.
Nokia welcomed the deal on Wednesday. “Nokia supports such consolidation moves,” a spokeswoman said. “It is important that our suppliers are strong industry players.”
Shares in Texas Instruments fell as much as 2 percent after the announcement but recovered to stand 0.4 percent lower at $24.72 at 1600 GMT. Investors worried that the company, which has been losing market share in the cellphone chip market, would now have an even tougher time regaining lost ground.
“It's a long-term negative for TI,” said Charter Equity Research analyst John Dryden. “The rebound TI was expecting in late 2009 or early 2010 will not occur.”
ST currently has Nokia, Samsung and Sony Ericsson – Ericsson's cellphones venture with Sony – as customers, while Ericsson has LG Electronics and Sharp as well as Sony Ericsson.
Svanberg will be chairman of the board of the new joint venture and ST's CEO Carlo Bozotti will be vice-chairman.
(Additional reporting by Niklas Pollard, Victoria Klesty and Oskar von Bahr in Stockholm, Tarmo Virki in Helsinki and Sinead Carew in New York; Editing by Sue Thomas and David Cowell)
