SMIC, TSMC drop swords; SMIC’s Chang out, Huahong NEC’s Wang in

November 10, 2009 – Significant changes are happening at Chinese flagship foundry Semiconductor Manufacturing International Corp., after rival TSMC won a court decision over trade-secrets misappropriation (a jury agreed with 61 of 65 alleged violations).

Company CEO Richard Chang has "resigned to pursue other interests," to be replaced by David N.K. Wang, formerly of Huahong Group and before that Applied Materials.

Terms of the settlement include:

– SMIC will pay $200M in cash over four years (in addition to $135M previously paid under an agreement forged in 2005 and disputed a year later), plus about 1.8B shares (an 8% ownership, worth about $88M based on current prices) and a three-year warrant to buy another 686M (to 10% ownership), though it won’t get a seat on SMIC’s board or be involved in day-to-day operations.

– SMIC won’t have to pay the remaining $40M it owes under that 2005 settlement. It also can continue to use the trade secrets and technology disputed in this case "subject to confidentiality restrictions, under a covenant not to sue." The two also have terminated the 2005 patent cross-licensing agreement.

SMIC considers the deal "a win-win," since it resolves uncertainties across the board for customers, investors, and employees. (Rumors had swirled that TSMC might receive $1B-$3B in damages.)

Speculation abounds as to what the ceased litigation and partnership might mean. TSMC opened a 200mm factory in Shanghai in 2004, but "the market has not developed as fast as we had hoped," admitted Chang, and few local chip designers "have the critical mass to grow" it into a business sizeable enough for TSMC, reports BusinessWeek. Meanwhile, a third of SMIC’s sales come from those domestic companies.

And despite their contentious past, a tighter combination may not be out of the question now, either. "This will likely be a precursor for a merger of the two companies," predicts Rick Hsu, analyst with Nomura, quoted by Reuters. Putting Wang’s solid industry background at the head "will hopefully bring in a new culture, a new mission and new results," he said.


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