Intel, STMicroelectronics merge flash units

In a continuing search for profits in the flash memory business, Intel and STMicroelectronics agreed on Tuesday to spin off some of their chip units to create a new semiconductor company.

Intel and ST will share ownership in the venture, which will be based in Switzerland and incorporated in the Netherlands, dedicating about 8,000 employees to making NOR and NAND-type flash chips as well as nascent phase-change memory. All three technologies are forms of nonvolatile memory, capable of storing data even when a device's power is switched off. But phase-change memory could offer faster data transfer and longer durability than flash, because it saves data by changing a type of glass from its crystalline to amorphous state, instead of trapping electrons in semiconductor cells.

The company will compete with Samsung Electronics, Toshiba, and Spansion to develop memory products for consumer and industrial products including cell phones, MP3 music players and digital cameras.

The move allows Intel to claim a cash payment of $432 million for part of its money-losing flash operation. ST will get a $468 million cash payment at close.

Earlier in May, Intel announced it would lay off about 1,000 workers at a flash chip fabrication plant in New Mexico as a cost-saving measure in its migration from 135-nanometer chip features to smaller, more efficient construction with 90nm, 65nm, and even 45nm parts. Intel has been losing hundreds of millions of dollars each quarter on the technology.

ST will be the majority owner of the new company, holding a 48.6 percent stake compared to Intel's 45.1 percent and a 6.3 percent holding by Francisco Partners LP, a private equity group in Menlo Park, California. That gives ST leverage, despite being the smaller firm; ST had $9.85 billion in revenue for 2006, far below Intel's $35.4 billion.

The payments made to Intel and ST will be funded primarily from a loan made by a consortium of banks to the new company, and in part from $150 million paid by Francisco Partners for its share in the business, said Intel spokesman Tom Beermann.

That means Intel and ST have essentially sold the units as those banks will ask only the new company to repay the loan. Yet, at the same time, Intel and ST will be able to claim most of the new company's future profits.

Both companies declined to name the banks that made the loan and also said they had not yet chosen a name for the new company. The deal is expected to close in the second half of 2007 after clearing the usual regulatory hurdles, Beermann said.

The deal is similar to the decision by Intel's chip-making rival AMD to spin off its own flash unit, creating Spansion in December 2005.

When it opens its doors, the company will use a combination of Intel's NOR flash assets and ST's NAND flash assets to concentrate on making memory chips for wireless communications devices, according to a statement by Brian Harrison, the president of Intel's flash memory group who was promoted Tuesday to be chief executive of the new company.

ST also named an executive to the new team, saying Mario Licciardello would rise from his current post as corporate vice president of ST's flash memories group to become chief operating officer.

This story was updated on May 22, 2007