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What Makes STATS ChipPAC Attractive?

STATS ChipPAC (SGX: S24), which is 84% owned by sovereign wealth fund Temasek Holdings, is a semiconductor chip tester with global operations.

Recently, it had received an offer from an unnamed party to take it private. The news was disclosed only after the company was questioned by stock exchange operator Singapore Exchange on 15 May 2014 over irregular trading activity which saw its shares spike by 14.9% on that day.

So what might make STATS ChipPAC an attractive target for an acquirer? At its current price of S$0.485 each, it has risen by 45% in a very short span of time since its close at S$0.335 last Wednesday.

Who are its competitors?

Although STATS ChipPAC is not a company that investors tend to follow in Singapore, it is actually the fourth largest chip-packaging and testing company in the world. Some of its major competitors include Amkor Technology in the USA, Advanced Semiconductor Engineering Group, and Siliconware Precision Industries. The latter 2 companies are both based in Taiwan. In total, STATS ChipPAC and its three big competitors take up 50% of the global market share for their niche within the semiconductor industry.

STATS ChipPAC’s competitive advantages (or lack thereof)

But despite being one of the gorillas within its industry, STATS ChipPAC has found it hard to build up any competitive advantages as the services it provides is found in a highly commoditized and competitive market. For instance, STATS ChipPAC has seen its gross margins decline from 17% to 13.6% over the past three years. Furthermore, it has also been running into losses in two out of the three years between 2011 and 2013.

To add fuel to STATS ChipPAC’s challenges, the company needs to constantly spend huge amounts of cash on capital expenditures to remain competitive in the market. Since 2011, the company has spent more than US$1.2 billion (around S$1.5 billion) in capital expenditures alone while its market capitalisation is only slightly above the S$1 billion mark.

Potential acquirers of STATS ChipPAC

The most likely acquirer of the company might be a player from within the industry. It might be either a customer or a supplier that sees STATS ChipPAC’s operations as a way to vertically integrate its own business.

Or, the acquirer might also be a competitor who sees the purchase of STATS ChipPAC as a cheaper way of increasing its own operational capacity since STATS ChipPAC has just re-invested considerable amounts of capital into its own business over the past few years..

At this point however, no matter how logical the guesses are, it’s all just conjecture and speculation unless STATS ChipPAC provides investors with more information.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.