Taiwan's LED Makers Breathe Sigh of Relief on Philips' Cancelled Sale of Lumileds to China

Industry executives believe Royal Philips NV's cancellation of selling its light emitting diode (LED) unit Lumileds to a consortium led by GO Scale Capital of mainland China will help Taiwan's LED makers breathe a sigh of relief, as the said sale, if materializing, would turn over Lumileds' 2,000-plus patents to their mainland Chinese competitors.

The Dutch company has announced the cancellation of the planned US$2.8 billion sale because of opposition from the U.S. Committee on Foreign Investment that is charged with vetting foreign acquisitions to protect U.S. national security.

Philips had agreed last year to sell an 80.1 percent stake in Lumileds to GO Scale, which was expected to transfer over 2,000 patents on LED components and automotive lighting held by Lumileds to mainland Chinese LED makers.

Since the said announcement, the price-earnings ratio at most of Taiwan's LED makers have been declining because foreign institutional investors have been aggressively unloading their stakes in Epistar Corp., recognized as Taiwan's biggest LED chipmaker, on fears that the sale would turn Lumileds into Epistar's competitor from a customer.

Industry executives estimate the sale cancellation to give Taiwan's LED makers three to five years of reprieve, with such period to allow Taiwanese makers to hang onto their lead, at least temporarily, before being equalled by their Chinese competitors.   

Informed sources point out that originally Philips had planned to sell the LED subsidiary to Epistar, which was reportedly seeking a private equity fund to finance the acquisition. However, Epistar abandoned the purchase due to being stonewalled by some of Taiwan's regulations.

Later, Epistar Chairman B.J. Lee publicly criticized the regulations that demand Taiwanese companies acquire money-losing foreign companies only for cash in consideration that share swaps usually end up undermining net value of an acquirer. He said such regulations are tantamount to depriving local makers of opportunities at bargains since most international acquisition deals call for huge capital outlay.

Shortly after Epistar canceled the purchase, GO Scale in no time approached Philips with the US$2.8 billion offer, industry executives say. They added that Philips could possibly again offer the deal to Taiwanese makers. Epistar, however, is not in a position to consider the acquisition simply because its money-losing operation due to overcapacity would not attract any fund provider to offer financing.

However, some intermediaries or parties with profit-making interests have suggested Philips take a 51-percent stake in Epistar, and consolidate the Taiwanese firm with Lumileds to create the world's biggest LED entity with integrated manufacturing capability. Neither Epsiar nor Philips has confirmed such reports.

Industry executives point out that rejection of the said deal by the U.S. government is further evidence that the U.S. is wary of mainland Chinese technology companies.

Unfazed by the Philips announcement, GO Scale Chairman Sonny Wu vowed to push ahead to build a leading LED lighting company that would pave the road to a global-scale LED industry in China.