Maybe Hynix Can Stay in the Chips

A new game plan has saved the company--for now

Soon after he was named chief executive of troubled Hynix Semiconductor Inc. early last year, Park Chong Sup distributed a CD-ROM to his staff. The disc contained a three-hour presentation in which Park explained basic financial terms and why the company was losing so much money. The message: The decades-long South Korean corporate obsession with sales and diversification is finished. Now, all employees must focus on making profits. ``We needed to change the whole mindset,'' Park says. ``Now all union members understand EBITDA [earnings before interest, taxes, depreciation, and amortization] and why they can't expect any bonus unless that figure is good.''

The message may be getting through--and not just to Hynix employees. Once seen as a basket case, Hynix, formerly Hyundai Electronics Industries Co., is suddenly considered worth investing in. On June 15, Hynix successfully issued $1.25 billion in stock listed on the Luxembourg exchange. That was 50% more than lead manager Salomon Smith Barney expected to raise.

The equity offering saved Hynix, the world's third-biggest maker of memory devices, from insolvency. It has $930 million in interest and $4.3 billion in principal coming due this year on its debts. The stock issue cleared the way for Korean banks to offer $4.4 billion in new funds or extensions of old loans. ``Hynix no longer has to worry about bankruptcy,'' says Daewoo Securities Co. semiconductor analyst Jeon Byeong Seo.

Credit for giving Hynix new life goes to Park, 53, a University of Chicago graduate and former Citibank manager who headed Hyundai Electronics' U.S. operations for four years. One of his first acts as CEO was to change the name to Hynix, distancing the company from the Korean chaebol. Then he began a brutal downsizing to raise cash and sharpen the company's focus. He raised $350 million by selling wastewater treatment facilities, shares in Hyundai Group telecom and steel units, and a Seoul office building. Park wants to unload Hynix' liquid-crystal display plants as part of a plan to raise another $460 million through asset sales. ``If it ain't semiconductor, it's got to go,'' Park says.

KEEPING PACE. While Hynix has financial breathing room, it's not out of the woods. It still has $8.7 billion in debt--roughly equal to annual sales. So Hynix must become extremely profitable to both service its debt and keep up with advances in technology. New plants making silicon wafers 12 inches wide--the current state of the art--run about $2 billion.

The global chip market isn't cooperating. The average spot price for a 64-megabit synchronous dynamic random access memory (DRAM) device, Hynix' top product, has sunk from $8.40 in August, 2000, to less than $1. The fear is that Hynix won't generate enough cash flow to finance new plants. That means it could fall hopelessly behind its bigger rivals, Samsung Electronics Co. and Micron Technology Inc. Lee Jeong Ja, head of HSBC Securities Inc. in Seoul, figures Hynix must cut debt at least another 50% by getting creditors to swap debt for equity.

Park says Hynix, with some $3 billion in cash because of its fund-raising and bank deals, has staying power. The money should cover operations and investments for a year. Instead of building new chip plants now, he's converting old memory plants to make logic and flash memory chips for products such as digital cameras and mobile phones. He wants to boost non-DRAM sales to 45% by 2003, from 18% now. One selling point is that Hynix now boasts a global-minded management. It has severed ties with the family of late Hyundai founder Chung Ju Yung, which was famous for corporate excess. Park recruited Park Sang Ho, a long-time IBM and Hewlett-Packard Co. manager, as chief operating officer. And he put outside directors in seven of Hynix' 10 board seats.

Park insists Hynix will survive a shakeout that could sink smaller DRAM makers. ``We have already crossed the hazardous river,'' he says. Now he must battle to keep Hynix safely ashore.

By Moon Ihlwan in Seoul

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