German chip maker gets €325 million state-led deal

The global bailout of DRAM chip makers moved forward on Sunday, with Qimonda AG announcing a €325 million (US$452.3 million) financing deal with three parties; the German state of Saxony, a financial institution in Portugal, and majority shareholder Infineon Technologies.

Germany's central government and the state of Saxony also teamed up to guarantee an additional amount of €280 million for Qimonda. The chip maker is in talks to draw on €150 million of that amount immediately.

The financial package, which includes a loan of €150 million from the state of Saxony, a €100 million loan from an unnamed financial institution in Portugal and a €75 million loan from Infineon, is aimed at giving Qimonda a chance to revamp its finances and finish ramping up new production technology to volume levels, Qimonda said in a statement.

In return for the deal, Qimonda pledged to continue to invest in its research and development and manufacturing sites in Porto, Portugal and Dresden, in the state of Saxony, Germany.

Infineon, which owns 77.5 percent of Qimonda's stock, thanked the various government offices for their "generous support."

"This is good news for the employees of our subsidiary Qimonda before the Christmas season," said Peter Bauer, CEO of Infineon, in a statement.

The package is contingent upon regulatory approval in Germany and the European Union as well as on the final agreement on the detailed terms and conditions of the various financing deals, Infineon said in a statement.

The big question mark surrounding the bailout is how long will the money last.

The DRAM industry downturn started long before the global financial meltdown that has prompted banks, auto makers and other companies to seek state-aid. DRAM chip prices remain far below the cost of production due to a chip glut, and with sales slowing for PCs and laptops, the main end-product for DRAM, the future remains murky for the chip makers.

Qimonda faces among the worst problems for DRAM makers. The company said it in a statement early this month that it could run out of cash sometime in the first three months of next year. And as of Sept. 30, it said it still held €432 million in cash.

Although it will bring in more cash through the sale of its holdings in Inotera Memories of Taiwan, the chip maker's own statement shows that it is burning through cash at a furious rate. Unless demand for DRAM makes a turnaround it will continue to hemorrhage cash.

Requests for comment on its financial status and how long bail out money might keep Qimonda in business went unanswered.

The company has delayed reporting its fourth quarter and fiscal 2008 financial results. In the Sunday statement it said expects to release those statements in mid-January.

The DRAM industry's problems are indicative of global woes.

Easy lending terms and a bright view of the future prompted DRAM makers to build too many new chip factories. Much of the new output was aimed at Microsoft's Windows Vista OS. The OS requires more memory per PC than older OSs, and DRAM companies hoped Vista would be a blockbuster and send people scurrying to buy new laptops and PCs or to upgrade memory in existing machines.

But those hopes faded as Vista sales failed to meet expectations. A new reality set in. Without strong PC sales to soak up all the excess DRAM pouring out of new factories, chip prices plummeted and DRAM companies started losing money.

The financial crisis has added to DRAM misery by making loans harder to come by and prompting some creditors to ask for early debt repayment. Now the situation appears to be further worsening because economic woes in many countries are causing consumers to rein in spending.

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