The Sarawak government has announced that its state-owned wafer foundry 1st Silicon (Malaysia) Sdn Bhd is to merge with Germany's X-FAB Semi-conductor Foundaries AG.

Government ministers and company officials have, however, refused to disclose details such as the extent of the prospective foreign partner's equity in the proposed new merger entity to be known as XFAB Silicon Foundaries NV, except to say the merger deal is expected to be finalised by the third quarter of this year.

The reason given for taking at least another six months to finalise the deal is that approvals are required from various regulatory bodies.

The move is not unexpected. The wafer foundry project, one of two in Malaysia, has been bleeding state coffers. Total investment to-date is about RM4 billion.

Even after the company moved its assets out and sold to a government's special purpose vehicle and made some net gains from the sale, informed sources say 1st Silicon is still making losses monthly on operations.

Yesterday, a senior company official told reporters after the signing of the merger agreement that this year's revenue is projected at around US$107 million or RM395 million.

Two options

But the asset sale is a one-off thing and analysts ask whether the performance will be reflected in the financial year ending December 31, 2005.

Market talk is that under the circumstances the government has two options - either to close down 1st Silicon or to sell it to cut down on losses and prevent further bleeding.

Apparently, the state has chosen to divest a major portion of its equity in 1st Silicon.

Market talk has it that the state government will probably retain 30 per cent with the rest in the hands of its foreign partner.

Even if it lost RM2b to RM3b from the investment, if, as optimistic government leaders had indicated, the new merger company could benefit from the syrnergy and marketing network of its German partner, there is more than an even chance of recovering some of the losses of the past year.

State DAP leader Wong Ho Leng told Malaysiakini today that the option the government has taken to merge with the foreign company is definitely a better one.

"The decision (to make the announcement now on the proposed merger) is both political and economic," he said.

"The state cannot possibly sustain the losses and with elections coming, they think that will quieten the opposition. They are wrong."

At yesterday's signing ceremony, Sarawak Chief Minister Abdul Taib Mahmud described the strategic merger and long-term partnership with X-FAB as a powerful union.

"It will further the state's goal to develop its world-class high-tech and knowledge-based sector", he said.

With the merger, the German company will have manufacturing facilities in four countries - Malaysia (Sarawak), Germany, USA and England - with a combined manufacturing capacity of 700,000 200mm equivalent wafers annually.