Montage Merger: Good for Shareholders, Bad for China

The deal between Montage and Pudong Science and Technology has just been finalized.  With 14.3% premium over Montage's closing price Monday it is hard to argue that this is a bad deal for shareholders.  But it is a bad deal for China. And by China, I mean for the medium-to-long-term development of China's fabless sector.  Now the state has gobbled up the most promising of the local companies.  A nice exit for Montage's investors it is, but five years from now will Montage be able to maintain any ability to innovate under state ownership?  Miracles may happen, but it would be the first such state-owned fabless firm to do so.  Even Newave, Howard Yang's original start-up, went into steep decline as IDT Newave (in terms of its design capabilities) once Howard left, and IDT Newave was owned by a multinational not a Chinese state firm.

Montage's IPO

It was good to see Montage's IPO last week on NASDAQ has done reasonably well after a less than stellar start (the firm's target price was lowered right before the IPO).  The price is now back at the upper end of the original target range and this represents a price premium compared to a firm like Actions.   Montage's stock performance (admittedly just one week) is well deserved given the firm's technical team and track record.  More importantly, it might be part of a turn around in the attitude of US equity markets towards Chinese stocks.  While many firms deserved their bad reputations and the scorn short-sellers heaped upon them, the good firms have suffered along with the bad.  China-based tech firms need to be treated with circumspection, but cannot all just be labelled as frauds waiting to happen.  Of course, it would be help if PCAOB would assure foreign investors and regulatory agencies that they could actually have access to the documents needed to properly vet Chinese tech firms. 

Hua Hong NEC and Grace merger finally going through?

Reuters claims that the merger of Hua Hong NEC and Grace is nearly a done deal with the last hurdle being regulatory approval (link here).

Foxconn and Brazil: Wild Promises and the Realities of Currency Appreciation

Apparently, Foxconn is growing cold on making major manufacturing investments in Brazil (link here).  Well, knock me over with a feather.  As I pointed out in a post earlier this year (link here), it was always highly unlikely (read: never gonna happen) that Foxconn would invest in short order 12 billion USD in manufacturing in Brazil, a figure that represents more than its total manufacturing investment in China.  In the meantime, the Brazilian Reais has continued to appreciate against the dollar (and was appreciating against the renminbi until late July), and the Brazilian government wisely has bargained hard with Foxconn over tax breaks, technology transfer and the like.  Of course, Foxconn's stand is that the Brazilian government has to make it worth Foxconn's while to invest, but such a stance will probably only increase pressure for the Brazilian government to do something to protect local manufacturing due to the currency appreciation shock.  Indeed, for those Brazilians disgruntled by what they perceive to be Foxconn's tough bargaining (would we really expect anything less from hard-nosed Terry Gou?), protectionist measures would likely be most welcomed because they would work to undermine Foxconn's leverage i.e. the firm would have to set up some facilities in Brazil to get around the protectionist barriers whereas right now it can happily ship its goods from China.

Chinese Yahoo: Who Cares(?)

Jack Ma, ever the provocateur, casually mentioned his interest in buying Yahoo at a seminar at Stanford University (link here).  The FT wondered whether this would be acceptable to Americans.  Certainly in Washington there will be the usual political grandstanding about Chinese investments in American "high-tech" firms, but given Yahoo's increasing irrelevance, would anyone outside the Beltway even care?

Global 450 Consortium's Albany R&D: Boon or Boondoggle?

The announcement Tuesday that the Global 450 Consortium (consisting of IBM, Intel, Samsung, GlobalFoundries and TSMC) will invest $4.4 billion in a R&D center in Albany has generated some excitement and considerable skepticism.   For the latter, take a look at the recent Mannerism's post (link here).  Beyond the vagueness of the promised R&D goals that Manners points out in his post, there are additional questions of the funding.  According to the companies and the New York state government, there are no state subsidies involved.  That should reassure those who fear that the project is simply a boondoggle by companies to extract subsidies out of governments' concerned about competitiveness.  However, the details of the plan have not been released and, as always, the devil is in the details.  One crucial area is tax breaks.  The state may not be giving these firms money, but IBM, which is reportedly spending 3.5 of the 4.4 billion, as a prominent New York corporate tax payer may benefit heavily from tax breaks.  Large tax breaks for a New York-based firm to do R&D where it has always done lots of R&D has the stench of a boondgoggle.  However, what makes economic and industrial policy so difficult is that it is hard to suss out from the beginning what benefits this large scale R&D project will have for upstate New York and the wider US semiconductor industry (the latter of course not being a concern of NY state pols).  We'll really only know if this project has proven to be a boon to the local economy and American industry many years into the operations.  Nevertheless, with firms like IBM no longer shy about moving highly skilled jobs to other locations around the world, one does not have to be a cockeyed optimist to think these operations may turn out to be slightly more of a boon than a bane, but only time and details of the tax deals will tell us which one it is.

TY Chiu is back at SMIC

The good news for SMIC is that TY Chiu is becoming CEO of SMIC (link here).   His expertise is running foundry fabs hyper-efficiently.  These skills should help SMIC's operations and were sorely missed at the SMIC since he left the firm the first time around in 2005. The bad news is that the conflicts between state shareholders and private shareholders and among the state shareholders of SMIC have not been resolved. The poor market outlook for the foundry in the coming months just adds to what look to be turbulent times for SMIC.