Although a merger between Global Foundries, a subsidiary of Advanced Technology Investment Company (ATIC), and Chartered Semiconductor (Chartered) would make strategic sense, we believe the offer price is low for minority shareholders and the timing is also unfavourable, given that Chartered should return to profit from 3Q09. We believe ATIC’s offer only takes into account the replacement value of Chartered, not the intangible value. Minority shareholders will have an opportunity to negotiate a better offer or reject the offer during the upcoming EGM.

In our view, the all-cash acquisition offer from ATIC would not have come as a surprise to the market, given the topic has been discussed widely since the end of 2008, and last week the share price was pushed up to near the offer price of S$2.68.

We have revised up our FY09 revenue forecast by 6% and revised down our net-loss forecast to US$127m from US$181m. We have also raised our six-month target price to S$2.65 from S$2.20. However, we believe a full takeover bid should command a more than 20% premium to Chartered’s fair value. We maintain our 3 (Hold) rating.

The near-term impact of the merger on the foundry industry would be limited in our view, but the merger could put pricing pressure on advanced 32/38nm process technology and dampen TSMC’s (2330 TT, NT$62.0, 2) profit margin in FY11.