InnoLux Merges with CMO

A consolidation not only in capacity but also in business model.

By David Hsieh - Vice President, Greater China Market, DisplaySearch

The rumor that had been circulating in the TFT LCD industry has finally come true. As recently as Friday, at DisplaySearch’s 2009 Taiwan TV Supply Chain Conference, there was much talk about a merger between CMO and InnoLux. On Saturday morning, November 14 Taiwan time, the CEOs of CMO and InnoLux, Mr. Kuo and Mr. Hsu, jointly announced the news. The unusual  Saturday announcement was scheduled to avoid an impact on the stock market.

Both companies are listed in Taiwan Stock Exchange (TSE); according to the terms of the merger, each InnoLux share will be exchanged for 2.05 shares of CMO stock. Closing prices on November 13 were NT$47 for InnoLux and NT$18.8 for CMO, so this seems like a very good deal for CMO. After the merger, which is expected to happen in 2010, CMO will be delisted from the TSE while InnoLux is to stay public. The name of the new company will be CMO, which means the ownership and management of CMO, along with over 30,000 employees, will be passed to InnoLux.

The merged company will be the third-largest TFT LCD maker based on area capacity, as shown in the following table:

Source: DisplaySearch Quarterly FPD Supply/Demand and Capital Spending Report

Our preliminary analysis of the merger indicates the following:

• Considering the high debt/equity ratio of CMO, the merger with InnoLux seems to be a good choice to stay in the TFT LCD industry.
• CMO has a strong TV customer base in China, which is expected to be the largest LCD TV market within two years. This will benefit InnoLux.
• InnoLux is not only a panel maker, but also a system integrator targeting OEMs; with CMO’s panel capacity, it will become stronger in the LCD TV OEM arena.
• The new company will be a threat to Samsung, LG Display and AUO, as it will have a diverse business model. InnoLux makes sets and is the second largest monitor OEM behind TPV, while CMO ships lots of LCD cells to LCD module partners. Foxconn, the parent company of InnoLux, is emerging as a big notebook PC OEM, and CMO’s panel capacity will be very useful.
• The biggest impact will be to the LCD TV OEM business. Foxconn is the OEM for Sony, and InnoLux is the OEM for Vizio and many others. CMO’s huge TV panel capacity will be key.
• InnoLux will keep its role as an OEM, and CMO will play the role of the panel supplier to the Foxconn Group. This will enable the InnoLux-Foxconn group to win more monitor, notebook and TV OEM orders in the near future.
• This will impact Samsung, LG Display and AUO, who compete with CMO. The direct result will be that InnoLux will reduce its purchases from Samsung, LG Display and AUO.
• InnoLux, which has been emerging as a LCD TV panel player, will gain access to MVA technology from CMO.
• The new company will become #1 in monitor panels.
• The new company will have the most complete fab line-up in the world, with Gen 3, Gen 4, Gen 5, Gen 5.5, Gen 6, Gen 7 and Gen 8 lines.

This merger is the latest example of the ongoing consolidation of the TFT LCD industry. CMO was hit very hard by the financial storm of 2008, and finally decided to retreat. Korean panel makers were impacted less by the crisis due to their strong brand presence and vertical integration. But now Taiwanese makers are consolidating, not just in capacity but also in the OEM business model to compete with Korean firms. This is a consolidation not only in capacity but also in business model.