Analyst Calls Texas Instruments' DRAM Exit a Good Move

Duff & Phelps Credit Rating Co. (DCR) said it favorably views Texas Instruments' (TI) recent decision to exit the troubled DRAM market (See related article), although DCR does not expect TI's agreement with Micron Technology to result in any near-term rating action.

The cyclical DRAM market is in a deep trough due to excess global capacity resulting in collapsing prices. Prices of some popular DRAM configurations have fallen 95% over the past two years. While its solid portfolio of other products, led by digital signal processors (DSP), would allow TI to weather the DRAM slump, the major issues are strategy and focus.

Near the two extremes of TI's semiconductor product line, DSPs and DRAMs represent radically different markets. TI controls 45% of the market for DSPs, which it invented. These chips allow the digital processing of signals representing sound, image, video and other real-world phenomena. The market is enjoying prodigious growth due to DSPs' importance in such devices as cellular phones, modems and a growing number of digital communications and entertainment devices. TI is focused on extending the design and promoting the application of DSPs.

At the other extreme are commodity DRAMs. With little say in the functionality, configuration, use or price of these devices, DRAM makers must focus on low-cost manufacturability, manufacturing efficiencies and service. Micron has done an exceptional job meeting what are difficult challenges even in good years, primarily through its concentration on low-cost DRAM design and manufacturing. Through transferring its designs and processes without duplicate development and overhead expenses, Micron is in position to make the most of the TI DRAM production assets.

TI is transferring to Micron its Italian and Texas DRAM wafer fabrication facilities (the latter of which will be mothballed), its Singapore assembly and test facility and its share in two remaining DRAM joint ventures, one in Japan, the other in Singapore. TI is giving Micron $750 million to fund the deployment of Micron's technology throughout the transferred facilities. In return, Micron is giving TI more than $600 million worth of Micron stock, $740 million face value of a convertible issue and $210 million face value of notes. Micron is also assuming $192 million of TI low-interest Italian mortgage notes.

The market value of the securities TI is receiving for the facilities net of the $750 million financing it is providing Micron is about $800 million. TI expects to take a loss on the transaction as well as a restructuring charge to eliminate overhead no longer needed with its more streamlined business profile. The agreement is an alternative to TI's having to incur future DRAM losses, restructuring charges, and capital expenses to keep the facilities competitive. TI's $129 million of first quarter 1998 DRAM losses have probably deepened since then.

The Micron common stock and convertibles could be valuable long-term investments. Micron has successfully specialized in a DRAM market that has historically fluctuated rapidly from deep losses to buoyant profitability. Current DRAM market problems are persistent but not permanent. Although riskier than keeping all of the $2.4 billion cash TI held at the end of the first quarter of 1998 in the bank, the Micron investment could produce a higher return.

From a rating standpoint, getting the $190 million mortgage off TI's books is a minor positive. DCR expects the agreement to result in less TI earnings volatility, less management distraction and the opportunity for TI to deploy its assets in the 'DSP Solutions' market, which it considers more strategic. The negative is that as TI exits other businesses, its revenues are increasingly concentrated in one market. However, if TI wants to put most of its eggs in one basket, DSP Solutions appears an excellent choice.

Edited by Bruce Bennett,
Computer OEM Online