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ST Conundrum: Break Up or Tweak?

It's difficult finding anyone today who doesn't believe chip giant {complink 5218|STMicroelectronics NV} urgently needs a new growth strategy. And that pertains to people both within and outside the European semiconductor giant.

Generally, company executives and industry analysts believe the Swiss-based semiconductor company must channel a new course for its future. The disagreement comes in deciding whether ST should drastically reorganize its operations and product portfolio, which means jettisoning burdensome and non-core offerings, or simply fine-tune its current strategy, stay the course, and gradually build up a formidable position in its market-leading products.

The company has said it will early in December unveil its plans and attempt to put to rest finally speculations about its future. Those speculations have centered on alleged plans by ST to split itself into two business units, a move the company has rejected. In a statement earlier this month, ST confirmed “its strong denial on the existence of a project which can compromise the unit of the company,” adding that “such a project has never been presented to the ST Supervisory Board.”

That may be the case, but ST's executives shouldn't fool themselves that anyone in the investment community would be surprised if they decide to go ahead with a split or dump ST-Ericsson, the communications IC joint venture with Ericsson that's considered a dead weight around the two companies' corporate necks. ST's management shouldn't be shocked, either, if investors react negatively to a plan that doesn't surgically pinpoint and address the company's perceived problems. In other words, ST must come up with a reorganization plan that confirms that the company cannot continue with business as usual.

A breakup of ST into two companies — one focused on analog and the other on digital ICs — makes little sense, in my opinion. The worn dialogue pitching analog and digital companies against each other in terms of return on investments is irrelevant in today's world. In fact, it is a short-sighted take on what semiconductor companies must do nowadays to not merely survive but be competitive and very successful. The analog and digital worlds co-exist and will continue to do so. For the biggest chip companies, analog and digital offerings are complementary and in fact may be critical to winning business at major OEMs.

ST's most important strengths lie in the extensive product offerings and the wide range of markets served, including automotive, computing, communications, control systems, consumer, and industrial automation. This has allowed the company to offset weakness in any particular market sector with strength in other segments. And, while its growth has been less than impressive lately — annual sales will decline for the second consecutive year in 2012 — the company's performance could have been worse had it not been able to rely on faster-growing product lines to counter the impacts of its weak segments.

That's where the advantages of ST's multi-product offerings end and the challenges begin. If your sales are seesawing the way ST's have been, then there's a fundamental problem with the corporate structure, and it's time the company's management finally acknowledges this and takes steps to correct whatever ails the enterprise. Analysts predict ST's 2012 revenue will be approximately $8.44 billion, down more than 12 percent from the $9.63 billion it reported in 2011 when sales fell 6 percent from $10.3 billion. Current projections for 2013 aren't that impressive either, with estimates ranging from as high as $9.75 billion (unrealistic) to as low as $8.7 billion (possible).

The swings in sales performance and margin-related pressures resulted in Standard & Poor's Ratings Agency putting ST on negative watch in August. ST, the research firm said, “is likely to report significantly lower revenues, operating margins, and free cash flows in 2012 than we previously expected, following a weakening of operating results that started in the second half of 2011.”

Nothing that has happened since August has dramatically and positively changed ST's profile. The company's digital semiconductor business remains fragile due to problems at Nokia and persistent weak demand in Europe as a result of the region's economic challenges. While ST's analog, MEMs, microcontroller, and discrete business have performed satisfactorily, this hasn't been sufficient to stem the losses. ST will likely end 2012 with negative operating margin (estimated by S&P's at about 9 percent) and a net loss for the entire year.

So what should ST be doing to spark growth? The idea of breaking the company into analog and digital businesses is tempting, but it will only accelerate the ruin of the weaker digital business. However, ST cannot maintain its structural integrity without taking some hard decisions about which markets it will remain as a strong competitor in. I will address the question above in another report. For now, I believe it's time for ST to say goodbye to ST-Ericsson. Holding on to the business makes no sense notwithstanding the huge investments ST and Ericsson have put in it. The business should go on the block.

ST then might see clearly enough to address its second major problem: the convoluted ownership structure that puts the French and Italian governments in key positions to call the shots about its future.

6 comments on “ST Conundrum: Break Up or Tweak?

  1. dalexander
    November 29, 2012

    @Bolaji…It is always interesting to discover that some company that has been around for years like ST is now in trouble. Moving with the times means advancing with the technology with an eye towards the competitor's offerings. In the set-top-box business I know that ST was losing CPU business to IBM because the firmware ST was using was locked into a particular chip design. When Cypress introduced Analog/Digital on the same chip, it was like a new era in circuit design. They had Pulse Width Modulators, (PWM) on the same chip as linear amplifiers and filters years ago. It seems like ST between the two sides, has the know-how to take advantage of that circuit topology and put out some pretty advanced parts. But, as you know, the FPGAs are getting pretty clever themselves with mixed technologies. Maybe companies like Xilinx or Altera are eating into STs lunch.

  2. prabhakar_deosthali
    November 30, 2012

    It seems to me that these established companies like ST or Nokia, Blackberry or HP have lagged in the pace for innovation. Their complacency has given way for the new companies to become their competition with innovative technologies .

    Like Douglas has said companies like Cypress have come out with mixed signal configurable technologies giving jolt to Analog purists.

    ST has to think something out of box to stay with this new competition.

     

  3. Houngbo_Hospice
    November 30, 2012

    @prabhakar,

    “ST has to think something out of box to stay with this new competition.”

    It is easier said than done. We have seen RIM struggling to catch up on its competitors with little or no success so far. The same thing can be said about Yahoo! or MySpace. They have tried, but it is difficult to “think something out of the box”.

  4. t.alex
    December 2, 2012

    MCU or CPU business is like commodity. You can find it everywhere. Think about Renesas; their core business is MCU and obviously they are losing. We can even customise from some vendor in Taiwan at much cheaper price. I think ST has to really make a difference to survive other than relying on its long time customer.

  5. Wale Bakare
    December 2, 2012

    @Douglas,thanks for your succint assertion!

    >>Maybe companies like Xilinx or Altera are eating into STs lunch.<<

    In fact a sector of micro-controller driving market – real time video application for security especially needs FPGA daughter board integration with its motherboard. This's exactly where Xilinx and Altera slamed the market doors on ST. Now leaving ST shivering in the cold.

     

  6. dalexander
    December 2, 2012

    @Wale…of course you are right. Xilinx sells IP Cores for encryption and combined with scrambling code, the STB is enabled for Conditional Access. Do you have an AV background?

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