Carlyle’s $5.5B offer for ASE sends Taiwan gov’t scrambling

November 27, 2006 – Venture capital interests have targeted another chip industry company — this time in Taiwan’s packaging field. In what could be the biggest acquisition ever in Taiwan, Advanced Semiconductor Engineering Inc. says it has fielded an offer from a consortium of investors led by The Carlyle Group, worth roughly $5.46 billion. Carlyle was part of the consortium of investors that bought Freescale earlier this year, and recently assisted in buyout deals for Jazz Semiconductor, AZ Electronics, and Toshiba Ceramics.

According to ASE, chairman and CEO Jason Chang has agreed to roll the 18.4% stake held by him and an affiliated holding company, ASE Enterprises Limited, into an equity interest in the holding company formed by the consortium. ASE noted that discussions have not yet been finalized, and any offer for outstanding shares of ASE has not commenced.

Strategically, the move is likely an effort to circumvent the Taiwan government’s ban on investment in China, according to analysts and press. The Ministry of Economic Affairs has yet to grant a single license to domestic packaging firms seeking to expand into China, despite relaxing the rules earlier this year.

The Taiwan Economic News reports that government officials and legislators are convening an emergency meeting, to discuss the case and decide on any measures to curb interest from foreign private equity funds in domestic financial holding firms. Officials from the Financial Supervisory Commission (FSC) are debating over two optional policies for such cases, according to the paper — one is a more controlling policy where the FSC would approve or reject such cases on a number of considerations, including conformance to the maximum interests of the domestic financial market, and impact on the domestic financial ecology. A second “laissez faire” approach would let the FSC check only whether such investments involve illegal capital sources or Chinese capital.

The paper also noted that legislators are preparing a motion to revise the Statute for Cross-Taiwan Strait People-to-People Relations in order to raise the existing 40% ceiling, on the basis of paid-in capital or book value, for investments by domestic firms in China.

There are be several other motivating factors for the deal. ASE will be able to leverage the other Carlyle-associated acquisitions, and ride atop the global wave of semiconductor backend outsourcing, according to Greg Zeluck, managing director and co-head of Asia buyouts at the Carlyle Group, quoted by the Associated Press. Carlyle also could be building on previous investment success in Taiwan — in July the firm purchased Eastern Multimedia, the island’s second-largest domestic cable TV operator, after reaping 300% returns from another investment in No.3 cable TV firm Taiwan Broadband, noted the Taiwan Economic News.

In a research note, FBR Research analyst Mehdi Hosseini also noted the move also is a strategic effort to attract additional IDM-type customers, particularly in Japan. Hosseini, who hiked his ASE stock expectations to “outperform” and doubled his share price targets, also pointed to a simplification of ASE’s corporate structure with its 51%-owned Singapore-based ASTSF unit, which has “dramatically improved its cost structure” and is expected to maintain >20% margins after years of losses in cyclical downtimes.


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