Breakingviews - SK Hynix’s $9 bln deal is chip sector’s quick fix

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HONG KONG (Reuters Breakingviews) - SK Hynix's chip deal is just what the sector needs right now. South Korea's semiconductor giant will buy Intel's NAND memory business for $9 billion - its largest acquisition ever. Less competition might prop up prices, which have plunged on uncertain demand. In the long term, stronger chipmakers may stand a better chance against Chinese entrants.

    Tuesday's all-cash deal will propel SK Hynix to become the world's second largest maker of so-called NAND chips, widely used in PCs, servers and smartphones. It's a prudent move for Intel boss Bob Swan, who has been grappling with product delays and technological fumbles while fending off competitors like AMD and Nvidia, which are muscling in on the company's main processor business. Offloading the NAND unit, which accounted for less than a tenth of total first-half sales, should help Intel refocus.

    Financially, the deal is a bold move for the $55 billion chipmaker, which specialises in making dynamic random-access memory chips. Adding the new business will help it overtake Japan's Kioxia and catch up with market leader Samsung Electronics, but will probably drag down profitability. NAND chips have lower margins than DRAM, and intense competition in the sector makes it prone to price wars. Analysts at Bernstein estimate gross margins at SK's DRAM and NAND divisions this year to be roughly 50% and negative 5% respectively.

Before this deal was announced, Morningstar analysts projected average selling prices for NAND chips would fall 18% annually between 2019 to 2024. Consolidation might slow or stop this slide. It will also provide a bulwark against eager rivals from the People’s Republic like Yangtze Memory Technologies Company, which are pouring billions of dollars into catching up. In this case, the best offense is a good defense.   

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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