Japan's NEC Electronics Corp and Renesas Technology may receive a $2.1 billion bailout from their parent companies to bring about the merger of the two loss-making chipmakers in a sector wracked by weak demand and prices, the Nikkei business daily said.
The two, which are seeking to create the world's third-largest semiconductor maker after Intel Corp and Samsung Electronics Co, said in a statement on Wednesday that they now aim to close the deal in September, pushing back the deadline for the second time by a month.
Shares in NEC Electronics, which makes chips for Toyota Motor Corp's Lexus luxury car and Nintendo Co Ltd's Wii game console, shot up 11 percent in its biggest jump in four months.
Investors were likely relieved that the April merger of the two arch-rivals might now be back on track.
Sources said the main sticking point in the deal -- widely seen as necessary for the chipmakers' survival -- had been unlisted Renesas's debt, estimated at about 250 to 300 billion yen ($2.66-3.19 billion).
The Nikkei said Renesas's parents Hitachi Ltd and Mitsubishi Electric Corp would foot most of the 200 billion yen in aid being discussed while NEC Corp, the parent company of NEC Electronics, would shoulder some of the restructuring costs.
This amount is probably what is needed to survive, said Mitsushige Akino, Ichiyoshi Investment Management Co's chief fund manager. It's not nearly enough to pay for the research and capacity that they need to win when the next upcycle comes.
The two firms are too good (for the parents) to abandon, but not good enough to risk their own businesses for, he said.
Four industry and government sources familiar with the matter said 200 billion yen is the minimum necessary for a merger of equals. The four asked not to be identified because the deal was still being negotiated.
The amount is unlikely to go far, though, as the bulk of Renesas's debt is short-term and it has restructuring costs to deal with, the four said.
They said the government might be persuaded to help out, as a deal would bring much-needed consolidation in Japan's battered system chip and microcontroller sector.
Japan pledged to shore up PC memory maker Elpida Memory Inc with public money, to be injected next week, under a scheme to help businesses hit by the global financial crisis.
The government has developed this new aid program. We would want companies to make full use of it, and if it means it would push forward consolidation and make Japan's companies stronger, we won't stand in the way, said one government source.
Parents NEC and Hitachi are nearing the limits of what they can do to help their chip units, as deep losses eat into their own capital. Sources have told Reuters that NEC is considering raising $2.1 billion in capital.
Renesas is expected to post a net loss of a little less than 90 billion yen in the year to March 2010, while NEC Electronics has forecast a loss of 9 billion yen.
Combined sales at NEC Electronics and Renesas totaled 1.2 trillion yen in the business year that ended in March, and a merger would create Japan's biggest chipmaker, surpassing Toshiba Corp.
The two, which have an estimated 20 to 30 percent product overlap, would create the world's dominant microcontroller maker with an almost 30 percent share of the market, with Freescale Semiconductor FSLSM.UL a distant second.
But analysts have said the two firms' differing technologies will limit cost-reduction measures, as executives and engineers fiercely defend their hard-won technologies.
Negotiations between the NEC and Renesas camps have been rocky as the two sides aim for a one-to-one merger. The companies had originally targeted an official agreement in July, and had already postponed it once for an August date.
Both specialize in microcontrollers, used in car engine control systems and power tools, and system chips, used to control multiple functions in cars and electronics.
NEC Electronics had previously been talking about a merger with the chip operations of Toshiba and also with Fujitsu Ltd, sources said.
NEC Electronics shares climbed to 980 yen, while NEC, which holds 65 percent of NEC Electronics, rose 3 percent to 341 yen.
Shares of Hitachi, which owns 55 percent of Renesas, and Mitsubishi Electric, which holds 45 percent, were flat, while the benchmark Nikkei average .N225 rose 1.4 percent.
(Additional reporting by Nivedita Bhattacharjee in BANGALORE; Editing by Michael Watson)