Philips sells chips for $10.6B as industry consolidates

Koninklijke Philips Electronics NV agreed to sell an 80.1 percent stake in its chip division to a group including Kohlberg Kravis Roberts & Co. (KKR), Silver Lake Partners and AlpInvest Partners NV, it said in a statement Thursday. The European electronics giant will keep a 19.9-percent share of the business.

The deal is another sign of broad consolidation in the global chip industry. Last month, Intel Corp. sold its communications and application processor business to Marvell Technology Group Ltd. for $600 million, while earlier this year, PMC-Sierra Inc. acquired the former storage semiconductor business formerly owned by Agilent Technologies Inc. for $425 million. The PMC-Sierra deal was also done through KKR and Silver Lake Partners, which bought Agilent's chip business last year.

Europe's second largest chip maker, Infineon Technologies AG, plans to use the stock market to divest its memory chip unit, Qimonda AG. Qimonda has filed for an initial public offering in the U.S., expected to fetch as much as $1.1 billion.

Philips cited a desire to shift away from cyclical businesses as one reason for the sale, a reason noted by a number of companies that have exited the DRAM (dynamic RAM) sector in recent years, including Infineon. The chip industry tends to run in a boom and bust pattern. Chip sales heat up at different times of the year, then slow down at others, causing financial results to leap and fall. The industry also has a two to three-year cycle in which shortages cause chip prices to spike, followed by companies rushing to invest in new factories that eventually flood the market again and send prices down.

The company also expects its semiconductor division to have a better chance to expand sales as a stand-alone unit. As part of Philips, it's hard for the chip division to sell products to rivals of Philips' other business units. Motorola Inc. made a similar argument when it decided to spin-off its chip division into Freescale Semiconductor Inc. two years ago. Prior to the spin-off, there would be no reason for a company such as Nokia Corp. to buy handset chips from the division, since it was locked in battle with Motorola for mobile phone market share.

Philips' Semiconductors posted sales of ?4.62 billion last year and ?4.49 billion a year earlier, racking up operating profits for the division in both years. The unit mainly focuses on chips for mobile communications, networking, consumer electronics, digital displays, contactless payment and connectivity, and in-car entertainment. It has around 37,000 employees worldwide.

The deal, which requires approval from regulators, is expected to close by the end of this year.