Infineon Technologies Losing Its Memory

Plans to break the company in two could put both entities in a tough spot.
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Infineon Technologies

(IFX)

is betting that the parts are more valuable than the sum with a plan to separate its memory division from the rest of the company.

But while the move gets Infineon out of a hypercompetitive, high-cost market, the strategy could put both of the newly created businesses in a tough spot.

The German chipmaker announced Thursday its intention to spin off the memory division, which accounted for 41% of the company's total revenue in its latest third quarter. Infineon will concentrate on the logic business -- providing analog, mixed-signal and radio-frequency chips to the automotive and industrial electronics industries.

"There are two essential reasons for taking this step," Chairman Wolfgang Ziebart said in a statement. "First, the processes and business models for memory and logic are developing in diverging directions. Second, we improve the growth dynamic and profitability potential for both companies."

According to the company, the memory products business, which primarily makes DRAM memory, will be carved out as a legally independent entity by July 1, 2006, with a subsequent IPO as the ideal option.

Shares of Infineon were recently down 1.37% at $9.39.

The divesting of the memory unit isn't surprising, said Jim McGregor, principal analyst at research firm In-Stat. The operations are incredibly capital intensive, requiring huge investments to stay competitive. And the commoditized nature of the business means memory makers are exposed to huge swings in pricing and demand.

"It can be a drag on profits," said McGregor.

The memory business hasn't done wonders for the stock, either. Shares of Infineon are currently trading about 13% above the 52-week low.

"What we're seeing take place is the market is willing to apply traditional semiconductor multiples to high-margin businesses," says Doug Freedman, an analyst at American Technology Research, which does not have ownership or investment banking relationships with Infineon. "And the problem is that when we have companies that are split between high-margin and low-margin businesses, the valuation tends to look a lot like the low-margin business."

Infineon joins

Advanced Micro Devices

(AMD) - Get Report

, which has filed IPO registration documents for Spansion, its memory subsidiary that is a joint venture with

Fujitsu

. Other companies have sold their memory divisions outright, as

Texas Instruments

(TXN) - Get Report

did when it sold its memory unit to

Micron

(MU) - Get Report

in 1998.

But exiting the memory business is a double-edged sword for a company like Infineon, because logic and memory could increasingly be integrated into a single chip as the market for consumer electronic gadgets evolves. "You almost want to keep that capability as you go after the higher-end logic components," said McGregor.

And it remains to be seen whether Infineon's memory unit can survive on its own, without the cushion that comes from being part of a larger, diversified company.

Samsung

, one of the world's major memory makers, can handle swings in that sector because of revenue from its various other businesses, like consumer electronics and flat-panel displays.

"It's really hard to be in a commodity market when you have to weather the swing without a parent that has other products that can help you out," McGregor says. "I would say the outlook for those small guys that are going to be stand alone is going to be very difficult."