Bailout, Taiwanese-Style

Enter the Taiwanese government. While nothing has been made public, there has been much supposition that the government wants these companies consolidated. More important from an investor's perspective, the government wants Micron (MU Quote) and Elpida (a Japanese company) to play a roll in that process.

Micron already has relationships with Nanya and Inotera courtesy of its acquisition of Qimonda's stake in Inotera and a joint venture (MeiYa) with Nanya. Elpida is the co-owner of Rexchip, a joint venture with Powerchip, and has acknowledged that it's in discussions with both Powerchip and ProMOS.

The Inotera purchase by Micron was more of a steal than a business transaction. For $400 million and the use of its stack process technology, Micron will get 50% of the 120,000 wafers per month produced at Inotera. The price tag is a small fraction of the cost of adding the capacity when you consider that Qimonda will take a charge on the transaction of approximately $440 million. Can you spell "desperation"?

The remaining ownership of Inotera resides with Nanya, which already had a relationship with Micron. Interestingly, Nanya's supervisory board is controlled by executives of Nan Ya Plastics, and Nan Ya Plastics is controlled by one of the most influential families in Taiwan. When Micron announced the acquisition from Qimonda, a portion of the funding was to be supplied by a "strategic lender" at favorable rates. Now it turns out that lender is Nan Ya Plastics. Hmmm...

So what is likely to happen when the dust settles in Taiwan? The government has two interests: first, maintaining a foothold in the DRAM industry as part of its electronics industry; second, employment. It is a motivated consolidator and can use outsiders to restructure the companies. The five separate entities will likely be pared down to two or three joint ventures with Micron and Elpida. More capacity will be taken offline as production levels are rationalized and processes are brought up to the industry's leading edge. More important, the capital to do all this will likely be provided by the Taiwanese government.

Micron and Elpida will have enhanced their own positions with minimal risk; reduced their cost basis by spreading process R&D costs over a far greater level of output; and reduced industry capacity, thereby enhancing pricing as well. All-in-all, not a bad way to come out of the worst industry downturn in decades.

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Know What You Own: Micron operates in the memory chips industry, and some of the other stocks in its field include SanDisk (SNDK Quote), Rambus (RMBS Quote), NetLogic Microsystems (NETL Quote) and Silicon Storage Technology (SSTI Quote). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.