Wednesday, June 18, 2008
[Originally for Sramana Mitra's site]
In the last part of this series, we looked at Infineon’s recent financials and pointed out that Qimonda is a key reason why the company is struggling to create more shareholders’ value. Let us now take a deeper look into Qimonda’s challenges and Infineon’s strategic initiatives to address the situation.
The picture below, taken from Infineon’s fiscal 2007 annual report, illustrates the root cause of Qimonda’s misery.
The DRAM prices dropped a whopping 29% in fiscal 2007 led by seasonal demand weakness, inventory build-up prior to the Windows Vista launch and capacity conversion from NAND to DRAM by the competition. The 44% increase in shipments and the continuing market diversification strategy were not enough to stave off these challenges leading to a net sales decrease of 207 million Euros in 2007.
Despite these issues, the DRAM business requires Qimonda to invest heavily in its research and manufacturing capabilities. In 2007, Qimonda announced plans to build new manufacturing facilities in Singapore and Malaysia. It also announced an agreement with SanDisk to jointly develop and manufacture Multi-chip Packages. Additionally, the company hopes to leverage its product and market diversification strategy to increase DRAM average selling prices (ASPs), profitability and return on capital.
Last week, Qimonda and Elpida, both top-5 DRAM suppliers, signed final contracts for a strategic technology partnership on joint development of DRAMs. Primarily a move to gain scale, this agreement encompasses a broad cross licensing of Intellectual Property that gives both companies higher design freedom while aligning their development interests. Elpida’s CEO is also quoted as saying that he was open to a share swap with Infineon.
Infineon wants to get out of the memory business. It announced recently that it wants to reduce its current 78% stake in Qimonda to below 50% by the 2009 Annual General Meeting. While not many will pay cash for this stake, share swaps with companies like Elpida may help constrict the supply and stem the free-fall in DRAM prices. With private equity unlikely to pick up Qimonda due to its unattractive cash flow, such share swaps may be the unfortunate reality that Infineon has to face today.
In summary, Infineon is unlikely to relieve itself of the memory business overnight. The huge write-off in the last quarter demonstrates that the company has realized this hard fact. It will have to swallow more losses despite its valuable R&D and manufacturing capabilities. From a valuation perspective, Qimonda will continue to have a considerable negative impact on Infineon’s share price.