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February 28, 2008

MGM Mirage's Use of Strategic Alliances

MGM Mirage is using strategic alliances to diversify itself from a concentration in the casino business into a diversified real estate developer as well. The alliance will allow MGM Mirage the ability to more quickly grow its casino and other related hotel, condo and non-casino related properties. The good news for MGM is that it will continue to grow its business without taking enormous amounts of debt which has been the standard in the casino business. The bad news is that MGM is giving up some the control that it has had over its casino and other related projects as well as share some the profits that traditionally has taken all to itself.

This strategic alliance is one that shares the financing and background of investors and real estate developers while MGM adds its brand name and expertise in design, construction and operations. The structure of the arrangement is through a series of joint ventures between MGM's newly created subsidiary, MGM Mirage Hospitality and a series of developers/investors such as Kirk Kerkorian and Dubai World.

This strategic alliance differerentiates itself from its competitors such as Harrah's Entertainment, Wynn Resorts and Las Vegas Sands, who borrow large sums for expansion. I believe it is a good idea for MGM to enter into this arrangement because is lowers the amount of debt and interest expense that it needs to carry on its balance sheet. The article suggests that the extra money saved can be used to upgrade its current casino and property locations.

However, the risk I see in this joint venture is that a conflict of interest over money may ultimately arise in this kind of arrangement. My suggestion is that each party have a clear understanding of the control, profit percentages and potential break-up plans in case things do not go well. With amounts that range in the billions of dollars, the stakes are very high and could make for a very messy divorce.

Attached is the article from Forbes in case the upload does not work correctly.

Title: Beyond Blackjack. By: Miller, Matthew, Forbes, 00156914, 2/25/2008, Vol. 181, Issue 4
Database: Business Source Premier
Beyond Blackjack
Contents

A Worldwide Gamble

Terry Lanni is transitioning MGM Mirage from a debt-heavy casino builder into a diversified real estate developer--using other people's money

On a brisk December evening in Macau, China, J. Terrence Lanni was all smiles. Cameras flashed as Lanni, chief executive of MGM Mirage, the second-largest casino firm in the world with $8.2 billion in estimated 2007 revenue, arrived on a red carpet to attend the black-tie opening of MGM Grand Macau. He greeted Pansy Ho, his partner in the project and daughter of Macau casino mogul Stanley Ho, with a kiss on each cheek.

After participating in several ceremonies for good luck--including one involving bowing in front of a roasted pig and then slicing into its back with a large butcher knife--Lanni retreated to a private dinner where 400 guests, including Stanley Ho and rival Steve Wynn, enjoyed shark fin soup and Kobe beef. Opera singer Sarah Brightman sang "Con Te Partiro," backed by the Hong Kong Philharmonic Orchestra. When the casino doors opened an hour before midnight, masses of eager Chinese gamblers rushed in to face their destinies at one of the joint's baccarat tables.
For Lanni the celebration marked more than the opening of MGM Mirage's first casino in China: The party capped off a stellar year for the company and its majority shareholder, billionaire investor Kirk Kerkorian, the seventh-richest man on The Forbes 400. Earnings were expected to rise 14% to $740 million for 2007; despite a post-October crash the stock ended the year ahead 46%.

But now Lanni has embarked on a new strategy that is aimed at remaking MGM Mirage from a debt-heavy casino builder into a diversified real estate developer that uses other people's money for expansion. That expansion will include not only more casinos but also hotels, condos and other noncasino properties.

The traditional casino model goes like this: borrow billions, build casino, operate casino, minimize losses at the tables, borrow against first casino, design new casino, repeat. Instead Lanni is partnering with deep-pocketed firms in joint ventures. The strategy is not defensive, he insists, but it will allow MGM to expand more rapidly and diversify revenue while keeping a lid on debt. The plan puts Lanni in sharp contrast to his counterparts at Harrah's Entertainment, Wynn Resorts and Las Vegas Sands, who borrow large sums for expansion. The downside: MGM will have to share profits and lose some control over projects.

To push the noncasino projects, Lanni created a subsidiary, MGM Mirage Hospitality. Its first deal will develop a $3 billion condo/hotel project in Abu Dhabi, part of a joint venture with Mubadala Development. MGM Mirage will invest no cash but will be paid licensing, branding and development fees in exchange for the use of the MGM name and design, construction and operational expertise. This development will provide $20 million to $22 million in annual fees to MGM, Lanni says.

MGM Mirage Hospitality will also soon be developing boutique hotels in China with partner Diaoyutai State Guesthouse--a move that will bring licensing income and the opportunity to sell the MGM name to Asian high rollers. The subsidiary is also developing a casino under the MGM Grand name at Foxwoods for the Mashentucket Pequot Indians in Connecticut; that partnership with the Pequots will also explore opportunities to develop other casinos across the U.S.

Last year Lanni finalized a multibillion-dollar joint venture with Kerzner International and Istithmar Hotels to develop a new casino resort at the north end of the Las Vegas Strip. In this off-balance-sheet move MGM Mirage will provide an $800 million, 40-acre plot of land to the project. Kerzner and Istithmar will throw in $600 million cash, then all three partners will finance the resort's construction, and split the operational costs and income the casino brings in when completed in 2012. In October MGM announced it would build a $5 billion casino complex in Atlantic City, a project Lanni says could be done with partners once construction begins.

Lanni also says that by roughly 2010 he can foresee MGM Mirage Hospitality being involved in as many as 15 noncasino real estate projects around the world, several in the Middle East and Far East with Dubai World. Last year, for $3.7 billion, Dubai World bought a 50% stake in MGM's $8 billion multiresort project CityCenter, currently the largest privately funded construction project in the world (see FORBES, Oct. 3, 2005), along with 4.5% of MGM's stock.

Lanni says it is too early to tell how much money this noncasino business will generate, but he volunteers that some analysts have speculated the licensing and development fees could bring in $300 million to $500 million annually within a few years. Based on the Abu Dhabi project numbers the company would need to license and develop 15 projects worth $45 billion to yield the $300 million estimate--an ambitious target, especially given the stalling of development around the world amid the credit crunch.

The deal with Dubai World was the finest example, Lanni says, of how he wants to partner on new projects. The sale of shares and part of CityCenter allowed MGM Mirage to take $3.7 billion in debt off its balance sheet and put the company in a position to partner with Dubai World on real estate developments it has planned around the world.
"Had we not done the sale to Dubai World and gone along with all of the other projects we plan to build, we would have $18 billion in debt on our balance sheet in 2010," he says. "Instead we will have $11 billion. That's nearly $650 million in interest we won't have to pay each year, which can go towards capital projects, paying down debt, dividends or buying back stock."

When the company purchased Mandalay Resort Group in 2005 for $7.9 billion, it bought some of the older themed properties on the Strip, including Luxor and Excalibur. Those need upgrades. MGM could also do something more with the 850 acres it owns on the Strip, a quarter of which are undeveloped or underdeveloped. Or it could pick up a few shares of its own stock, which, at $73, is off 27% from its fall high.

Lanni says MGM's main rival, Harrah's Entertainment, the largest casino operator in the world with $10.5 billion in revenues, will spend the next few years paying down debt, while MGM Mirage pours its cash into refurbishing its existing casinos. Harrah's was recently bought by private equity firms Texas Pacific Group and Apollo Group for $27.8 billion in cash and assumed debt. "We partnered with a bank," says Lanni, when speaking of Dubai World. "They married a mortgage company."

A Worldwide Gamble

Here are some of the casino--and noncasino--projects MGM Mirage is building with partners.

Legend for chart:

A: PROJECT
B: PARTNER
C: COST
D: LOCATION
E: OPENING

A: MGM GRAND CASINO AT FOXWOODS
B: Mashentucket Pequot Indians
C: $700 million
D: Connecticut
E: June 2008


A: CITYCENTER--MULTICASINO, HOTEL, CONDO COMPLEX
B: Dubai World
C: $8 billion
D: Las Vegas Strip
E: 2009


A: MGM-BRANDED BOUTIQUE HOTELS
B: Diaoyutai State Guesthouse
C: Unknown
D: China
E: Unknown


A: CONDO AND HOTEL RESORT
B: Mubadala Development
C: $3 billion
D: Abu Dhabi
E: 2012


A: CASINO RESORT
B: Undetermined
C: $5 billion
D: Atlantic City
E: 2012


A: CASINO RESORT
B: Kerzner International and Istithmar Hotels
C: $5 billion
D: Las Vegas Strip
E: 2012
PHOTO (COLOR)
PHOTO (BLACK & WHITE)
~~~~~~~~
By Matthew Miller
________________________________________
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February 27, 2008

Tiffany & Co. has high hopes for Swatch watch deal

Tiffany & Co. has high hopes for Swatch watch deal
By Andria Cheng, MarketWatch

NEW YORK (MarketWatch) -- About 30 years after deciding to develop its jewelry line over its watch business, Tiffany & Co. said it's finally paying attention to the long-neglected segment. The luxury retailer announced this past weekend it will partner with Swatch Group, its biggest partnership in its 170-year history.
The Swiss watchmaker will help the retailer produce and sell a line of Tiffany & Co. (TIF:
Tiffany & Co. TIF40.75, +0.29, +0.7%) branded watches to help significantly catapult watch sales, which represented about 2% to 3% of the company's $2.6 billion in total revenue last year, Tiffany Chief Executive Michael Kowalski said in an interview on Wednesday. That compares to 20% to 40% of sales for some of the other larger luxury brand companies, he said.
"There's a potential to grow significantly above that" of where Tiffany's watch business is, said Kowalski. "Watch has always been an underdeveloped business at Tiffany. It can be a substantial business for Tiffany. We expect it to grow dramatically."
The first line of watches may be unveiled as early as the second half of 2008 with a full collection expected to be introduced in 2009, according to the companies. They will sell for prices similar to Tiffany's existing collections, which range from $1,600 to $10,000, Tiffany spokesman Mark Aaron said.
The deal is equally significant for Swatch, the Swiss watchmaker (CH:001225515: news, chart, profile) said. Swatch, with about $5 billion in sales, will add Tiffany to its 18-brand portfolio that includes luxury lines Omega, Longines or Breguet.
The business can eventually grow to "several hundred million" in sales and be as large as Tiffany rivals Bulgari or Cartier's watch businesses, said Nick Hayek Jr., chief executive of the Swatch Group, in a separate interview on Wednesday.
Swatch will create a new subsidiary in Switzerland devoted to making Tiffany-branded watches, headed by Nayla Hayek, daughter of Swatch founder Nick Hayek Sr.
"This is a clear signal that it's important to us," said Nick Hayek Jr. at a news conference at Tiffany's flagship store in New York on Wednesday.
Swatch and Tiffany's 20-year partnership will help Tiffany devote more resources to "significant" advertising of its watches, Kowalski said.
The agreement also will help Tiffany tap into Swatch's "substantially larger" network to expand its namesake watches to where Swatch sells its luxury lines or where Tiffany rivals Bulgari and Cartier sell their timepieces, executives said at the news conference.
Tiffany's watches are sold in its 180 stores, on its Web site and about 100 independently operated locations that represent a "very small" percentage of sales, Tiffany spokesman Aaron said. The two companies also will collaborate on marketing and design. Tiffany first began making watches in 1846.
"This is better than anything than we could have achieved on our own," Kowalski said in the interview. "Fundamental economics of this partnership is certainly very attractive. Vertical integration ultimately is margin accretive."
Tiffany will get an undisclosed percentage of pre-tax profit from Swatch. Swatch also will take over production of the existing collections including Atlas, Tiffany Grand and Tiffany Mark. Swatch said it'll significantly ramp up capacity to meet the production demands of Tiffany watches.
Tiffany announced Monday it will take about $20 million in pre-tax charge to discontinue some of the watches and related inventory.
Andria Cheng is a MarketWatch reporter based in New York.

Google Health Begins Its Preseason at Cleveland Clinic

By Steve Lohr Published: February 21, 2008, The New York Times

For 18 months, Google has been working to come up with a product offering and a strategy in the promising field of consumer health information. Until now, the search giant hasn’t had anything to show for its labors other than bumps along the way — delays and a management change.

But on Thursday, Google’s technology for personal health records, which is still in development, is getting a big endorsement from the Cleveland Clinic. The big medical center is beginning a pilot project to link the health information for some of its patients with Google personal health records.

Cleveland Clinic is at the cutting edge of health information technology, and its more than 100,000 patients each has a personal health record. But a sizable portion of those patients are retirees, notes Dr. C. Martin Harris, the clinic’s chief information officer. Many of them, he said, spend about five months elsewhere, typically in Florida or Arizona, and the clinic’s sophisticated electronic health records don’t follow them there.

“It forces the patient to become his or her own medical historian,? Dr. Harris said.

The Google personal health record, he said, is a solution to that problem, among others. A person can approve the transfer of information on, say, medical conditions, allergies, medications and laboratory results from the clinic’s computers to a Google personal health record — a series of secure Web pages.

The pilot project will last six to eight weeks, and involve less than 10,000 patients. The project with Cleveland Clinic is “a milestone? for Google, said Marissa Mayer, a vice president, who took over management of the health team six months ago.

Google’s personal health record is still in development, and it will be introduced publicly and made widely available, after the pilot project is concluded, Ms. Mayer said.

To be sure, Google is only one of several companies trying to make a business from Web-based personal health records. Microsoft, for example, brought out its entry, called HealthVault, last October, and it has commitments from medical centers including New York-Presbyterian Hospital and the Mayo Clinic. WebMD, Revolution Health and others also offer personal health records.

While it’s still not entirely clear what Google’s personal health record will be like, its approach seems to be ambitious and comprehensive. Google has its own user interface, while Microsoft, for example, appears to be focusing on back-end storage. Google is offering automated data links, so the patient does not have to type in personal data, as is required with some personal health records. And Google, along with Microsoft, has the deep pockets and technological knowhow to offer personal health records free to millions.

Other medical centers are ready to sign up. “This is truly a patient-controlled health record, and that’s a very significant step in the drive toward a more consumer-oriented system of health care,? said Dr. John D. Halamka, chief information officer of the Harvard Medical School.

Dr. Halamka is also chief information officer at Beth Israel Deaconess Medical Center in Boston, which plans to link its electronic patient records with Google personal health pages. He is also a member of
Google’s Health Advisory Council.

http://bits.blogs.nytimes.com/2008/02/21/google-health-begins-its-preseason-at-cleveland-clinic/

Sony to own one-third of Sharp's $3.5 billion LCD plant

By Kiyoshi Takenaka

TOKYO (Reuters) - Sony Corp said it would take a one-third stake in Sharp Corp's $3.5 billion LCD panel plant set for completion by March 2010, in an effort to meet fast-growing demand for flat televisions.

The move is the latest in a wave of alliances among Japanese flat TV makers as they try to secure enough panels while keeping initial investments in check to fight steep price declines.

Sharp, which offers Aquos LCD TVs, plans to turn the liquid crystal display factory, which would be the world's largest, into a joint venture, with the Osaka-based company owning 66 percent and Sony taking the remainder.

Besides LCD panels, the joint venture will also produce LCD modules, which are display panels equipped with components such as a backlight unit and LCD driver chips.

Sony and Sharp are the world's second- and third-largest LCD TV makers, behind South Korea's Samsung Electronics Co Ltd

The two Japanese companies plan to hold a joint news conference at 7 p.m. (1000 GMT), where Sony President Ryoji Chubachi and Sharp President Mikio Katayama will speak.

"For Sharp, this is a positive step since it means a major buyer that would keep the 10th-generation factory busy," Daiwa Institute of Research analyst Kazuharu Miura said.

Sharp's new factory would use so-called 10th-generation glass substrates, which can yield more panels than earlier-generation, smaller glass substrates, improving production efficiency and helping both firms offer attractively priced flat TVs.

Global LCD TV sales are likely to more than double to 155 million units by 2012, according to the Japan Electronics and Information Technology Association.

"Sony needed an extra source of panels because the large-size LCD TV market is growing faster than it had expected. As Sony expands TV production, it is natural to seek to diversify panel sources," said Park Hyun, an analyst at Prudential Investment & Securities.

"Sony is likely to continue the partnership with Samsung.... Therefore Sony's diversification strategy won't have a negative implication for the alliance with Samsung."

Sony, which aims to sell 10 million units of its Bravia LCD TVs in the current business year to March 31, runs another LCD joint venture, S-LCD, with Samsung.

The announcement follows Toshiba Corp's decision late last year to buy LCD panels from Sharp, while Panasonic maker Matsushita Electric Industrial Co Ltd said earlier this month it would spend 300 billion yen ($2.8 billion) to build an LCD plant in the face of robust LCD TV demand and tight panel supplies.

Aggressive investments in panel capacity, however, have raised investor concerns about a potential supply glut.

"The problem will be 2010 and 2011. Just when TV demand is likely peaking, Sharp's 10th-generation plant will come onstream, and so will Matsushita's new factory," Shinko Securities analyst Hideki Watanabe said.

"Today's deal gives Sharp good risk hedging."

Shares in Sony closed up 1.2 percent at 5,200 yen, while Sharp was flat at 2,100 yen. The Tokyo stock market's electrical machinery index IELEC.rose 0.3 percent.

($1=107.94 Yen)

(Additional reporting by Edwina Gibbs in Tokyo, Rhee So-eui in Seoul; Editing by Mike Miller)

http://www.reuters.com/article/technologyNews/idUSTFA00300220080227?pageNumber=3&virtualBrandChannel=0&sp=true

February 26, 2008

Motorola: Left to Its Own Devices

News Analysis February 25, 2008, 12:01AM EST

Motorola: Left to Its Own Devices

The equipment maker's inability to find a buyer for its beleaguered cell-phone unit revives the urgency of reforming the division from within
by Olga Kharif and Roger O. Crockett

To many the recent announcement that Motorola (MOT) was exploring options for its troubled handset division was seen as a sign the once-legendary business would soon be sold. That seemed a better outcome than, say, a spinoff or internal overhaul for a business mired in losses.

Yet almost a month later, despite rumors of acquisition interest from such heavyweights as Korean electronics maker LG and U.S. PC giant Dell (DELL), bankers, analysts, and industry executives close to Motorola say a sale is neither imminent nor likely. Several Asian handset makers have publicly said they're not interested (BusinessWeek.com, 2/4/08). One banker gives a sale a "50-50" chance, at best.

And while potential buyers may have run proposals by the phone-making giant, none appears willing to offer as much as Motorola's management is seeking. Analysts say the beleaguered business is worth no more than about $8 billion—a far cry from the $10 billion it was once suggested that Motorola might be able to fetch. The lack of acceptable bids has added renewed urgency to Motorola's backup plan: an in-house revamp. Improved performance would help Motorola sell the division at a more attractive price later, spin off a higher-value asset, or even hang on to a revitalized handset maker.

A Fixer-Upper
From early in his tenure, Motorola CEO Greg Brown has given strong signals he's intent on tuning up the cell-phone business. He has taken operational control of the unit, replacing former head man Stu Reed, who has left the company. Those familiar with Brown's plans say he has been weeding out underperforming executives and those he had no hand in hiring. Meanwhile, he's attempting to attract the talent Motorola desperately needs. "He knows what to do to fix this business," says Robert Laikin, CEO of Brightpoint (CELL), a major cell-phone distributor.

Plenty needs fixing. In the fourth quarter, handset sales tumbled 38%, to $4.8 billion, from a year earlier, and the division lost money. Motorola's share of global cell-phone unit shipments dropped from 22% in 2006 to 13.8% last year. Had Motorola found a buyer, "they'd certainly not be selling on a high note," says Todd Rosenbluth, an analyst with Standard & Poor's.

Brown may also need to spend big to ramp up handset production. Mark McKechnie, an analyst with American Technology Research, estimates the company needs to spend $500 million to $2 billion to come out with a new and exciting product line. Adds Motorola shareholder Eric Jackson, president of Ironfire Capital: "The R&D pipeline was really bare [six months ago] and still is." As of December, Motorola had $2.75 billion in cash.

Collaborative Effort
Although a deal isn't imminent, the prospect of a sale or at least a partnership is not dead. Banking sources say major private equity funds, from Blackstone Group (BX) to Silver Lake, are circling the company. And lots of private buyers may be interested. Some Chinese vendors such as ZTE have long wanted to conquer the U.S. market and have talked about cultivating relationships with Motorola. "ZTE often talks with other leading telecommunications manufacturers around potential opportunities for collaboration," ZTE said in a statement. Company officials declined to comment on a potential alliance with Motorola's phone unit.

Motorola told analysts during the industry's big trade show in Barcelona earlier this month that it has two parties interested in the business. Company officials would not specify which, but they acknowledged looking into partnerships as well as a sale. So it's conceivable that Motorola might enter into a joint venture with a company with a proven track record in consumer marketing. Potential partners include LG, Samsung, and even Google (GOOG).

Pressure to Act Fast
Nor is anyone ruling out a spinoff, now or in the future. These kinds of spinoffs are in Motorola's blood: Back in 2004, the company spun off chipmaker Freescale Semiconductor, earning its investors hefty short-term returns. Freescale was later snapped up in 2006 by a consortium of private equity firms. "We think the most likely scenario is a spinoff to shareholders," says Richard Windsor, an analyst with Nomura. "It gives [shareholders] an option to stay or go."

Unfortunately for Brown, many investors are choosing to go. The company's stock is down 30% since the beginning of the year. Most analysts don't expect Motorola to sell more than 30 million handsets this quarter, which would mean even further erosion in share. "They've got to do something quick," McKechnie says. "The asset is deteriorating."

February 25, 2008

Media Firms Create Online-Ad Network

Four of the largest U.S. newspaper publishers have teamed up to create an online ad-sales network, the second such partnership to be formed in the newspaper industry in recent years.

Gannett Co., Hearst Corp., the New York Times Co. and Tribune Co. are setting up the network as a stand-alone company called quadrantOne. Like a consortium created by Yahoo Inc. and a group of newspapers last year, it will allow national advertisers to buy space on certain of the Web sites operated by their newspapers in a bid to capture new sales as revenue at their print editions evaporates.

While Yahoo's partnership doesn't have guaranteed access to the Web- site ad inventory of its affiliate newspapers, quadrantOne will get access to a certain percentage of the ad inventory. QuadrantOne will include more than 120 papers, whose Web sites reach a total of 50 million unique monthly visitors, the company said. All four publishers have devoted funding to the company.

The network doesn't include Gannett's largest paper, USA Today, or the New York Times, which already have their own national sales operations. Instead, those companies will use the system to place ads on local titles such as the New York Times's Boston Globe.

QuadrantOne is designed to let national advertisers buy space in many local papers as well as on the Web sites of local television affiliates, without media buyers and planners having to make calls to multiple companies. If a marketer "can make one phone call to a portal or 100 in local markets to get the same audience" for their product, "the answer . . . would be a no-brainer," said quadrantOne interim Chief Executive Dana Hayes.

The formation of the partnership comes as the newspaper industry is struggling with falling advertising revenue, a result both of advertisers defecting to the Web and the weak economy. Difficult industry conditions sparked a new wave of cost-cutting this week. Yesterday, the New York Times said it will cut about 100 newsroom jobs this year, out of an editorial staff of 1,332, believed to be the largest such reduction in its history.

The cuts, through buyouts, attrition and possibly layoffs, came one day after Tribune said it would shed as much as 2.5% of its staff, including cuts at the Los Angeles Times, Chicago Tribune and Baltimore Sun. Tribune yesterday named Russ Stanton as the new editor at the Los Angeles Times, its largest paper. Mr. Stanton, previously innovation editor of the paper, will be the Times's fourth editor in three years. His three predecessors all invoked budget-cutting issues as a reason for their departures. Another Tribune paper, the Orlando Sentinel in Florida, said its publisher, Kathleen Waltz, was resigning as well after 34 years with the company.

Cuts in the industry have been sparked by investor unrest, leading to some mergers. Tribune recently went private in an $8.2 billion buyout. The New York Times is facing a dissident investor group that has nominated a slate of people to run for seats on its board.

Yesterday, New York Times Chairman Arthur Sulzberger Jr. and CEO Janet Robinson had breakfast with a representative of the group, according to a person familiar with the matter. It is the second meeting the executives have had with a member of the group, which includes hedge fund Harbinger Capital Partners and Firebrand Partners LLC, an investment firm led by Scott Galloway, an associate professor at New York University's Stern School of Business.

A spokeswoman for the Times declined to comment.

The investor group as of Tuesday had amassed 10.5% of the Times's publicly traded shares, according to a Securities and Exchange Commission filing last night, and wants the Times to focus more on its Internet strategy. As of 4 p.m. in New York Stock Exchange composite trading yesterday, New York Times's shares rose 86 cents, or 4.8%, to $18.84.

Earlier this week, the Times nominated Dawn Lepore, the CEO of Drugstore.com Inc. and an eBay Inc. board member, and Robert Denham, the former CEO of Salomon Inc., to its board. It also said that Sara Lee Corp. CEO Brenda Barnes and Centerview Partners LLC partner James Kilts will step down. The company is expected to oppose the directors that Harbinger and Firebrand nominated.

Rober MacMillan, Wall Street Journal, February 15, 2008

February 23, 2008

Successful chip manufacturing alliance, Common Platform Alliance

In the $21.5 billion chip-manufacturing business, size matters. That's why chipmakers-for-hire that don't have huge volumes of business are banding together to gain economies of scale. The leading example of this kind of collaboration is the Common Platform Alliance, a venture of IBM (IBM), Korea's Samsung, and Singapore's Chartered Semiconductor.

The alliance is a nice thing for IBM and Samsung, since manufacturing chips for other companies makes up just a small part of their overall revenues. But it's vital for Chartered, which does nothing else. "If we were doing this by ourselves, we would spend at least three times as much, and we'd run a very high risk," says Chartered Chief Executive Chia Song Hwee. "If we ran into difficulty, we'd have nobody to work with on a solution."

The positives for Chartered are plain to see: Five years ago, when it first aligned with IBM, Chartered's annual revenues were just $449 million, with a $417 million loss. "We were behind on technology and losing customers because of our financial situation. It was not a pretty picture," says Chia. Last year, in contrast, the company pulled in $1.414 billion in revenues and made a profit of $67 million. Chartered was the No. 3 contract chip manufacturer in the world last year, behind Taiwanese giants TSMC and UMC, according to market researcher Gartner (IT).

Still, Chartered's market share of 7% was dwarfed by TSMC's 46% and UMC's 17%. IBM was in fifth place, with about 4%, and Samsung wasn't even ranked. Also, last month, Chartered reported its first loss in seven quarters, due to weak demand. All this helps explain why the three companies chose to band together and share resources (see BusinessWeek.com, 8/20/07, "Microsoft and Cisco: Product Promises").

"Leading-Edge Business Model"
Chip manufacturing is such a competitive and costly business that Gartner analyst Bryan Lewis believes the Common Platform Alliance model should be adopted by other second- and third-tier chipmakers as a survival strategy. "I do think we'll see other alliances develop over time that will move in this direction, but this is a leading-edge business model, and it will take time for others to copy it," says Lewis. He believes the alliance could eventually pose a threat to TSMC and UMC.

The alliance partners use IBM's cutting-edge chip plant in East Fishkill, N.Y., as a laboratory for trying out new manufacturing processes. Chipmaking in so-called fabs is a complex business—as much R&D as manufacturing. Once new processes are tried out and codified at the IBM plant, they're transplanted to Chartered and Samsung factories, where the ramp-up process continues. (Samsung joined the alliance in 2004.)

By having three teams of scientists and engineers tinkering with the processes in three locations, bugs are discovered—and fixes found—more quickly. "One of the benefits we hadn't anticipated is that when we introduce new technology, because of the collaboration, we're able to bring the fabs up to a productive and profitable level probably twice as fast as before," says William Zeitler, general manager of IBM's Systems & Technologies Group.

At first the three partners simply shared sophisticated, detailed technologies and processes, but more recently they began to share manufacturing capacity as well. If one of the three can't handle all the orders it has for a part from a particular customer, some of the work can be shifted to a partner's plant.

Security and Flexibility
The unusual alliance also makes it easy for customers to set up dual-source or even tri-source arrangements. Customers like the security and bargaining leverage that comes with having more than one source for a chip. So the fact that these three companies can all manufacture a chip in exactly the same way is attractive to customers.

That's something TSMC and UMC can't offer. Late last year mobile-phone-chip specialist Qualcomm announced that it would order parts from all three Common Platform Alliance partners. The processor for Microsoft's (MSFT) Xbox 360 video game console is made by IBM and Chartered.

The three alliance partners have to accept the fact that they have given up their ability to differentiate themselves based on basic manufacturing technologies and prices. Of course, when they compete with each other for business, they can still price differently, market imaginatively, and offer additional services or benefits.

Partnerships like this are complex to manage. UMC was IBM's original manufacturing partner, but it dropped out in 2002 when it disagreed with a technology choice IBM made—a bet by IBM that turned out to be wrong. IBM researchers had to scramble to come up with an alternative. UMC officials declined to comment about the breakup.

UMC's pullout gave Chia pause, but he did his due diligence on IBM and decided that its technology was sound and that its strategy complemented Chartered's. Since then the two companies have been in sync. "Collaboration is like marriage. You have to manage it," says Chia. "The key thing is having the right mindset to work together."

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