trumpeted its latest flash memory deal as the start of a new era.
For the chipmaker's investors, though, the best part of the news is that it brings the company closer to closing the book on its involvement with NOR flash memory.
Intel announced plans Tuesday to form a new joint venture with
and private-equity firm Francisco Partners. The yet-to-be-named company will focus exclusively on flash memory chips, and have a combined revenue of roughly $3.6 billion.
That would make the company the No.1 player in the market for a flavor of flash memory known as NOR, vaulting it ahead of
, which had sales of $2.6 billion last year.
"From the outset, the company will be a leading supplier of flash memory solutions for wireless communications," said Intel's Brian Harrison, who will become the CEO of the new company.
Shares of Intel closed Tuesday's regular session up 1.6% at $22.99. STMicro shares were up 1.9% at $20.26.
Flash memory, which retains data even when an electronic device's power is switched off, has become a popular component in gadgets such as MP3 players, cell phones and digital cameras.
But the fast-growing segment of flash memory is based on NAND technology, which is typically used to store the music files, digital photos and other files. Intel has a separate effort under way to tackle the NAND flash market through its 2005 joint-venture with
NOR flash memory, by contrast, is better suited to storing the programming code that runs the gadgets and as such has less promising prospects for future growth.
Intel's efforts to conquer the flash memory market have not proven particularly lucrative. The company's flash memory group (which includes both NOR and NAND) has lost money for the past three years in a row, reporting a $555 million operating loss in 2006.
And with Intel having
shed various unprofitable or nonessential businesses during the past year, analysts and investors expected the NOR flash business would be the next piece to go.
Tuesday's deal, expected to close in the second half of the year, is not exactly a divestiture -- although it's an important first step in that direction.
"It's a joint venture that allows them to divest it in the future," says American Technology Research analyst Doug Freedman.
Under the terms of the deal, Intel will sell its NOR assets, while Geneva-based STMicro will sell both its NOR and NAND assets to a new joint venture owned by the two companies as well as by Francisco Partners.
The new joint venture will pay Intel and STMicro for the assets by taking out a $1.3 billion term loan from a consortium of banks.
Francisco Partners will kick in $150 million and get two seats on the company's eight-member board of directors.
The hope is that the new venture will improve its financials enough to eventually go public, providing the real NOR exit for Intel and STMicro.
Until that time, however, Intel must continue to shoulder the burden of the troubled NOR business. With a 45% stake in the new company, Intel will record 45% of the gain or loss from that business on its income statement.
In a conference call announcing the deal, STMicro CEO Carlo Bozotti said he's hopeful that the new standalone company will turn a profit in its first quarter of existence.
But he provided few details, other than mentioning the synergies of the company's scale, as to how it will get out of the red.
Jim Handy, a flash memory analyst with Objective Analysis, says the best way to improve the cost structure will be to upgrade to chip-manufacturing facilities that use 300-millimeter wafer processing equipment, instead of the current 200-mm gear.
Moving to 300 mm can cut costs by 30% says Handy. But building a 300-mm facility is incredibly expensive, and it's not clear how soon the new company would be able to begin production if it does decide to make the investment.
Because Intel and STMicro's flash businesses are so similar, the near-term path to profitability may be through old-fashioned cost cutting. That could include shutting down some of the duplicate existing chip manufacturing facilities, says one investor with a position in both Intel and STMicro.
Shuttering fabs would reduce the industry's overall supply of NOR chips and presumably bolster prices for the chips.
That would benefit more companies than Intel and STMicro.
Spansion, the main competitor of the new joint venture, had
the biggest boost in trading Tuesday after the news, with its stock jumping 9.6%, or $1, to $11.44.