Micron Crumbles Under Hynix Bailout

It's not even 2003 yet, and already the new year's starting off on the wrong foot for DRAM maker Micron MU.

Micron shares dropped 6% Monday after one of its big rivals, Korean memory-chip maker Hynix, scored a bailout from its creditors. Micron investors had been hoping Hynix would go under, reasoning that a bankruptcy by a big producer might ease the pricing pressure in an industry that has long been plagued by overcapacity.

But today, Hynix's creditors, mostly state-controlled banks, OK'd a $4 billion debt-relief plan. Under the plan, which includes a $1.6 billion debt-for-equity swap, $2.5 billion worth of debt will be rolled over to 2006, according to a Seoul-based AP report.

Shares of Micron gave up 59 cents to $9.71 Monday, meaning that the stock has lost about a quarter of its value since the Idaho company delivered weaker-than-expected earnings two weeks ago.

News of the bailout comes as a disappointment to investors who have long been hoping for consolidation among DRAM (dynamic random access memory) vendors. In the past couple of years, excess capacity in the industry has led to fierce pricing battles and weighed on revenues. In the wake of previous bailouts, Hynix, which holds about 12% of the DRAM market, was considered the likeliest to go belly-up.

Memory Lane Top DRAM makers, by global market share
Company/Headquarters	Share (%)
Samsung (Korea)	34.2%
Micron (U.S.)	18.4
Hynix (Korea)	11.5
Infineon (Germany)	11.3
Nanya (Taiwan)	6.3
Source: iSuppli

In a note, Prudential analyst Hans Mosesmann said the bailout will exacerbate the troubles of the DRAM industry. "Hynix's new life likely disrupts the DRAM market for another year in the form of over-supply and weak average selling prices until we see a major transition to higher-speed DDR DRAMs," he wrote, referring to so-called double-data rate memory chips.

Today's announcement is bound to inflame Micron, because the bailout of its competitor comes through banks controlled by the Korean government. In November, Micron filed a complaint with U.S. and international trade agencies alleging that Korean government subsidies to Hynix and industry leader Samsung have skewed the playing field.

Late in the day, Micron released a prepared statement on the bailout, saying it will "continue to object vigorously to these ongoing illegal subsidies."

"This decision was made despite ongoing US Dept. of Commerce and International Trade Commission investigations into nearly $12 Billion worth of similar bailouts in recent years and an ongoing investigation by the European Union into those same improper subsidies," Micron said. "The bailout decision was also made despite repeated protests in recent weeks by US Congressional representatives and the US Embassy in Korea to stop further government subsidization of Hynix."

But many analysts have cast the trade complaints as a mere sideshow to Micron's bigger problem: chronic DRAM overcapacity.

Micron's latest earnings, released earlier this month, offered more fodder for DRAM bears. The company reported its eighth quarterly loss in a row and missed Wall Street's earnings estimates by 15%, prompting many to speculate that the company will have to hit the capital markets before long.