Chinese LED maker MLS as a potential acquisition of Taiwanese LED chip manufacturer Epistar has become the latest gossip in Taiwan’s LED industry. Following the market rumors, the LED chip maker’s shares have soared, giving the LED stock market a major boost. Market rumors claim Chinese manufacturers potential investments in Taiwanese companies have allowed local LED enterprises to reevaluate their market value. However, LEDinside interviews with local market research companies noted the chances of MLS acquiring Epistar was fairly low, and the Chinese company’s current focus was mostly directed towards bidding Osram’s lighting business. A senior MLS official also told LEDinside, “We currently do not have any plans (to acquire Epistar).”

Epistar’s current share value is NT$ 20 (US $0.61), but its net value is estimated to be over NT $50. For interested buyers, Epistar’s relatively low share value makes it a worthy investment. Analayses by a Hong Kong investment company also supported the perspective that Epistar was a good investment that could potentially attract Chinese companies or other foreign investors.\

Forest Lighting or also known as MLS senior officials have denied market rumors of acquiring Epistar. MLS General Manager Lawrence Lin posing during a recent photo shoot at Taipei Building Show. (LEDinside)

A closer inspection of Epistar operations indicate its LED chip prices are still at a low point on the market, and the company might be pressured to further lower prices, due to its inventory levels. The future outlook for Epistar remains challenging, and the company needs to solve low profitability issues for its low to mid class LED chips used in lighting applications. Moreover, the company needs to actively develop high profitability LED chips for high end lighting applications, and niche market applications.

For large Chinese LED enterprise MLS, current market pricing conditions makes purchasing LED chips and LED dies a more economic option over acquiring a new company. If MLS merged with a Taiwanese LED company, it will need to deal with MOCVD depreciation issues. This would place it at a disadvantage compared to other Chinese epiwafer manufacturers that are heavily subsidized by the local government, such as San’an Opto.

Additionally, LED patents is another issue that industry insiders have raised concerns about. Epistar has signed cross-patent license agreements with large international LED players including Cree, Philips, Lumileds, and Toyoda Gosei. If MLS acquired Epistar, they would not be able to transfer the cross-licensed LED patents to a third party company, in this case MLS. This was clearly stated in the cross-patent license contract.

Although, Osram has scaled up its R&D investments in LED production, it still intends to sell its lighting business, which comprises its lighting brand, distribution channels, and manufacturing sites. The sell package has attracted buyers including Tsinghua Tong Fang, ETI and MLS. The first two companies are LED epiwafer manufacturers that are much smaller than San’an Opto, by buying Osram’s lighting business these companies will be able to vertically integrate their supply chain, or in other words vertical integrations. These two companies will be able to increase their LED exports, which would be beneficial to their companies. MLS on the other hand, is already China’s largest LED packager, and by acquiring Osram’s lighting business it will be achieve even greater effects.

If MLS can successfully acquire Osram’s lighting brand and distribution resources, the company would be able to expand exports to the European market. It is estimated the company would spend about US $1 billion to $2 billion on the acquisition, compared to acquiring Epistar at its current market value, it would be more beneficial for MLS to buy Osram’s lighting business. By absorbing Osram’s lighting business, MLS will have control over markets in Europe, China and even some Asian markets in the future.

Taiwan’s Investment Commission review process is another reason behind MLS reluctance to purchase Epistar, the possibility of the commission approving the acquisition is very low. It would be possible for MLS to become an Epistar shareholder, which would work in favor for both companies virtual integration strategies, and bring their partnership closer.

When LEDinside asked a senior MLS official about the acquisition rumor through an email correspondence earlier Thursday, the source replied: “We currently have no plans to acquire (Epistar).”