The merger of STMicro and Nordic (chips) has political logic, not financial

Investigación con semiconductores.
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Keeping Nordic in Europe would please Paris and Rome, STMicro’s main shareholders

STMicroelectronics CEO Jean-Marc Chery has two good reasons to bid for Nordic Semiconductor and an even better one not to. The risk for the shareholders of his designer-maker of chips, of 26,000 million, and whose main investors are France and Italy, is financial.

Nordic, valued at 4,000 million, shot up after Milano Finanza reported that STMicro was studying an offer. They would form a formidable couple in the fast-growing field of chip design for the internet of things. STMicro boasted in 2019 to be number two in the world in general-purpose microcontrollers – for household appliances, or machines from the factories of the future. Nordic specializes in connecting devices to the internet. It believes its latest low-power chips could both process data and provide connectivity. A smart keyboard or parking meter could use a kit of yours.

Political considerations seem equally attractive. With Dialog in the process of being bought by Japan’s Renesas, Nordic is one of the few remaining European designers. Maintaining its much-sought-after technology in the region would likely please Paris and Rome (which ultimately support Chery), and Brussels, which wants to create continental champions of the chips.

None of this changes the questionable financial logic. Assuming a 30% equity premium, Nordic’s business value would be $ 4.6 billion. In return, STMicro would make only 200 million operating profit in 2025, according to Refinitiv. Assuming a tax rate of 22%, it implies a measly 3.5% return on invested capital.

Chery could argue that the revenue boost and cost savings would raise that number. But they would have to be monumental. To achieve a 10% profitability, the operation would have to generate an additional operating profit of 370 million, which is equivalent to a quarter of the combined forecast for this year. STM shares reacted with falls. Investors are right to be nervous.