Intel-ST deal: What it means

Even though Intel had the larger business, ST managed to pocket 8 percent more than Intel in stock and cash compensation, according to a research note from Objective Analysis.

ST's NAND and NOR revenues added up to $1.57 billion last year, while Intel pulled in about $2 billion in NOR sales. But Intel gets a 45.1 percent equity ownership stake in the new company and $432 million. STMicroelectronics is due to receive a 48.6 percent equity stake and $468 million.

"When asked about this the companies stressed that this was a negotiated deal and that all parties were pleased with the results," said Jim Handy, principal analyst at the market research firm. "The companies frequently mentioned their combined patent portfolio of 2,500 issued and 1,000 pending patents. This is likely to have been a key factor in determining this valuation, which was stated to be approximately $3 billion."

There was little said regarding 300mm wafer manufacturing, but ST's shuttered M6 facility in Catania is part of the package and could be the home for such an advanced fab. ST and Intel indicated that if the new flash business begins to turn a profit in the first quarter of 2008, then some of that money could be funneled into building 300mm capacity. "We can only guess that this new-found profitability would stem from scaling their products from 90nm to the current volume 65nm process, then to 45nm in the near future," Handy said.

Since both of Intel's joint ventures sell NAND flash, to avoid confusion, Intel's joint venture with ST will sell NAND into the cellular market and other embedded applications as part of a stacked package, such as NAND/NOR or NAND/DRAM, Handy said. Intel's joint venture with Micron — IM Flash — will sell NAND into the commodity market.

Here's Handy's rundown on what the deal means to the industry:

Spansion pulled ahead of Intel into a leading position in NOR in 1Q06, a position that it will have to yield to the new firm. Spansion plans to return to profitability via its migration to 45nm and its new SP1 300mm fab which has already started processing wafers and is expected to ship revenue units in the second half of this year. A 300mm fab usually gives about a 30% cost reduction over 200mm. So although Spansion may be losing its positions as both the first-ranked NOR manufacturer and the largest pure-play flash maker, the company is quite likely to be the first NOR maker to return to profitability. This will make it easier for Spansion to invest early and perhaps pull ahead of the new company. This will be an interesting race to watch.

Samsung has set a goal of becoming number one in NOR revenues by 2009 or 2010. Had ST and Intel remained separate entities this would have been easier — both companies were in the $1.5-2.0B range in sales last year, and Spansion had $2.6B in NOR revenues. With the new company already at a revenue level of $3.6B, (most of which was NOR), Samsung will need to grow revenues by another $1B to reach its first-place goal.

Hynix is in an enviable position, moving from a single flash partnership with ST to now having joint ventures with ST, Intel, and SanDisk, all in the space of a few months. Hynix will be managing the Wuxi China fabs and other manufacturing plants in a relationship that should give it very large volumes that will help the company take advantage of economies of scale.

Intel and ST will be able to distance themselves from the difficulties posed by their NOR businesses in the past, yet they can profit from the larger scale of the operation and its narrowed focus. Once the new company becomes profitable these two will have the option of making a capital gain on sales of its stock.

OEMs will now have no second source for the products that Intel and ST introduced 2 years ago, under their agreement to second-source each others' NOR chips. This was a strategic initiative that will be a casualty of the deal. Other companies may use this to try and convert Intel/ST designs to their own products. The new company believes that their synergies in providing a complete solution will outweigh any disadvantages OEMs see in the lack of an alternate source.