Japan's NEC Electronics Corp will absorb Renesas Technology Corp after raising a total 200 billion yen ($2.2 billion) from their parent firms, which could smooth the way for the government to also extend aid to the loss-making chipmakers.
NEC Electronics and Renesas, who seek to create the world's third-largest semiconductor maker, will receive investments of 82.5 billion yen from Hitachi Ltd, 67.5 billion yen from Mitsubishi Electric and 50 billion yen from NEC Corp, the firms said in a joint statement.
But the money is unlikely to go far to fund investments that would yield new growth for the two firms, weakened by sluggish demand in a sector dominated by bigger rivals Intel Corp and Samsung Electronics Co.
NEC Electronics and Renesas face a combined net loss of 99 billion yen this year and significant restructuring costs ahead. The two are estimated to have a roughly 20 to 30 percent product overlap.
Japan's new Democratic Party government is more likely than not to make use of a new aid programme designed to shore up businesses hit by the global financial crisis, one Economy Ministry official said last week.
Nothing is certain, he said, asking not to be named because he was not authorised to talk to the media. But it would be easier to get understanding (from the public and politicians) if the parents are also willing to help out. Semiconductors are important for Japanese industry as a whole.
Under the new aid scheme, Japan shored up PC memory maker Elpida Memory Inc with a government-backed credit line last month. NEC and Hitachi are themselves nearing the limits of what they can do to help their chip units, and sources have told Reuters that NEC is considering raising capital.
Customers of NEC Electronics include Toyota Motor Corp and Nintendo Co. Renesas supplies Nissan Motor and Mitsubishi Motors Corp, according to analysts.
The new firm -- which would become Japan's biggest chipmaker, nudging out Toshiba Corp -- will be called Renesas Electronics Corp after listed NEC Electronics absorbs unlisted Renesas' operations on April 1.
Renesas's Yasushi Akao will be president of the new firm, while NEC Electronics' President Junshi Yamaguchi will be chairman, the firms said.
Heavily indebted Renesas will issue shares worth 78 billion yen to its parents Hitachi and Mitsubishi Electric before the April merger.
After that capital injection, each share of NEC Electronics will be worth 1.189 share in Renesas, the companies said.
The merged entity will then issue shares worth 122 billion yen to Renesas' parents as well as to NEC Corp, which now commands a 70 percent stake in NEC Electronics.
The new firm would issue 133 million shares at 917 yen per share.
NEC Corp will be the top shareholder in the merged firm with a 34.96 percent stake including treasury stock, followed by Hitachi with 30.73 percent and Mitsubishi Electric with 25.14 percent.
NEC Electronics was advised by Goldman Sachs and Daiwa Securities SMBC. Mitsubishi UFJ Securities and Mizuho Securities advised Renesas.
Shares in NEC Electronics closed up 1.6 percent ahead of the announcement, which was well-flagged by media. NEC ended flat while Hitachi and Mitsubishi Electric nudged up in line with benchmark Nikkei average's .N225 0.5 percent rise.
(Editing by Michael Watson)