Will Infineon Be Forced to Pay Qimonda $4.2B?

The 2006 spinoff of Qimonda AG was meant to improve profitability and lessen capital expenditure requirements for Infineon Technologies AG (NYSE/Frankfurt: IFX) but is turning into a nightmare for the German company. In a press release today, Infineon said Qimonda's insolvency administrator wants it to pay €3.35 billion ($4.2 billion) plus interest to settle outstanding litigation resulting from its alleged failure to capitalize the former business unit properly.

The administrator initially asked Infineon to pay €1.71 billion. Infineon did not say why the amount has been nearly doubled.

Infineon is trying to boost revenue growth. Bloomberg reported this month that Peter Bauer, the newly appointed CEO, had given a cautious outlook for 2012 and said orders had fallen slightly, due to weak demand in southern Europe that countered modest improvement in Asia.

Against this backdrop of weakening sales, the Qimonda request is getting a spirited response from Infineon, which said it disagrees with the bankruptcy administrator both on the amount requested and the basis for the request.

In a response to the initial request, Infineon said the administrator had claimed that "the value of the memory business contributed to Qimonda AG as a non-cash contribution in connection with two capital increases in the spring of 2006 was not only not equivalent to the price of the new shares issued in return, namely Euro 600 million in total, but was actually negative." The company said it had "made a detailed examination of the value of the non-cash contribution, will continue to vigorously defend itself against the claims, and remains confident about the outcome of this lawsuit."

When Infineon decided to spin off its memory operation as Qimonda, pricing in the DRAM market was sinking, and few participants were turning a profit. The huge capital expenditure required to remain competitive in the sector was dragging down Infineon's more profitable business units. It seemed like a good idea at the time to spin off the operation, contribute assets and other resources, and get out of the memory business.

Qimonda was the second-largest memory maker in the market at the time of the spinoff, but it couldn't hold that position, and it slowly slid into liquidation. A court ruling against Infineon would be financially devastating for the company. It reported €2.2 billion in cash and short-term investments at the end of the first quarter, and even though it had only €205 million of long-term debt (for a net cash position of approximately €2 billion), it would still have to borrow heavily to foot a bill that large.