MediaTek to Buy Chip Design Rival MStar for $3.8 Billion

MediaTek Inc. agreed to buy MStar Semiconductor Inc. in a stock and cash deal that values the smaller rival at $3.8 billion, and end competition between the two Taiwanese designers of chips used in televisions and phones.

MediaTek plans to acquire up to 48 percent of MStar in a tender offer before a full merger expected to close early next year, the two Hsinchu, Taiwan-based companies said in a statement today. MStar shareholders would get 0.794 of a new MediaTek share plus NT$1 ($0.03) in cash for each stock held, a 20 percent premium to today’s closing price, they said.

Both companies, which together design more than 70 percent of the chips used in televisions globally, have lost more than 36 percent in value in the 18 months since MStar listed on the Taiwan Stock Exchange. The deal on completion would be the fifth-largest semiconductor acquisition globally in the past ten years and the largest in Asia over that period, according to Bloomberg data.

“This is good for MediaTek and MStar to lower price competition in TV and handset chips and to build up R&D and operational efficiency,” Eric Chen, who has a buy rating on both companies at Daiwa Capital Markets in Hong Kong, wrote in a note today. “We believe the new MediaTek has better bargaining power to deal with China TV makers without excessive price competition.”

Chen estimates the combined entity will have more than 75 percent of the worldwide TV chip market, and 60 percent share of the semiconductors used in cellphones sold in China.

‘Stronger Position’

The terms value a full acquisition of MStar at $3.8 billion and 20 percent higher than today’s market value, MediaTek Chief Financial Officer David Ku said today. The 19 semiconductor acquisitions in the past 10 years valued more than $1 billion have an average premium of about 30 percent, Bloomberg data show.

“Given intense competition globally, including rapid changes in market dynamics, the combined company will be in a stronger position and become more competitive,” MediaTek Chairman M.K. Tsai said at a press conference today in Taipei. There will be no job losses as a result of the deal, he said.

MediaTek shares climbed 1.1 percent to NT$274 and MStar added 1.1 percent to NT$182.50 at the close of trading in Taipei before the deal was announced. MStar has lost 39 percent since it listed on the Taiwan Stock Exchange in December 2010 with an offer price of NT$300, while MediaTek has fallen 37 percent over the same period.

“We don’t really get caught up with the history of our IPO, we have to judge the dynamics of the market and take the long-term view,” Wayne Liang, Chairman of MStar said. “The market changes, the competition is changing.”

MStar, founded in 2002, had revenue of NT$36 billion ($1.2 billion) last year and gets about 65 of its sales from chips used in televisions. MediaTek, formed in 1997, had revenue last year of NT$87 billion, its second consecutive year of sales declines.

The deal requires approval of both companies’ shareholders as well as regulators, Liang said.

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