The merger of the world's second and third largest memory chip makers is likely to prompt a recovery in memory chip prices.
In the proposed merger, Micron Technology will take over all of Hynix Semiconductor's memory operations and take a 25 per cent stake in its non-memory business.
Agreement on the terms is expected next week but, with uncertainties about chip price recovery, tough negotiations are expected. The combined company will be larger than market leader Samsung.
Andrew Norwood, semiconductor analyst at Gartner Dataquest, said: "The dynamic random access memory [DRam] market has been an absolute disaster.
"Between September 2000 and October 2001 prices declined by 95 per cent to less than one dollar for a standard 128Mb chip. The trouble is they cost $3.50 to produce and chip makers have been haemorrhaging money."
Norwood said that Hynix, formerly part of Hyundai, was thought to be close to bankruptcy with debts of £5.5bn ($8bn). Hynix is reported as expecting the equivalent of £3.7bn whereas Micron is currently only offering about half this figure.
But DRam has recovered to around $3.50 as demand has increased. According to Norwood: "This announcement has frightened buyers. The price will be over $4 next week because the choice of suppliers is reducing."
Toshiba pulled out of the commodity DRam business in December, selling some assets to Micron.
Compaq's unexpected fourth-quarter profit has been fuelled by strong PC demand while Micron believes that first-quarter 2002 unit shipments, which are usually weak, will match the previous quarter.
Meanwhile, the sharp decline in memory chip prices was blamed by chip design company Rambus for a 28 per cent fall in its first quarter revenues. Yet it too beat Wall Street expectations.
Norwood said that Rambus' future was more uncertain because Intel had switched from supporting Rambus DRam to double data rate DRam.
Rambus is suing chipmakers, including Micron and Hynix, over the use of its high-speed memory patents to try and make them pay royalties for chips not designed by Rambus. "Without Intel it now lacks a high volume buyer," said Norwood.
The Micron/Hynix merger will strengthen its position to control chip supply if PC sales continue to recover.
But the relative success of memory chip companies is also dependent on which memory types are most popular. Rambus DRam is expensive but overcomes the operating frequency and bus width limits even of double data rate DRam, so has greater long-term growth potential.
SRam, used for primary and secondary cache alongside the processor, is several times more expensive than DRam and its variants, and capacity to date has been limited to 64Kb.
Samsung is the market leader in flash memory used in a PC's bios, and both DRam and flash have applications in many other devices.
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