The main objective of Epistar’s acquisition of TSMC SSL is to obtain key LED substrate technology to prevent Japanese manufacturer Toshiba from taking the lead in GaN-on-Si technology, according to a Chinese-language Wealth Magazine report.

Despite having many technology advantages, TSMC SSL has reported years of financial losses, due to lack of economics of scale and distribution channels. From 2011 to 2013, TSMC SSL lost NT $3.65 billion (US $11 million), more than half of TSMC initial NT $6 billion investment in the company. Its parent company, TSMC, a leading semiconductor manufacturer, had been considering selling the ailing subsidiary for a while.

Foxconn subsidiary AOT was the first company to show interest in acquiring TSMC’s LED arm, but the two companies were unable to reach a consensus on the acquisition terms or financing. AOT has a share capital of only NT $1.45 billion, while TSMC SSL reported a NT $6.0 billion share capital.

A Nikkan Kogyo Shimbun report became a decisive factor behind Epistar Chairman B.J. Lee’s decision to squeeze out competing bidder AOT. The report published in July 2014 noted Toshiba would invest 50 billion Japanese Yen in new LED equipment from 2014 to 2016 to raise white LED die monthly production capacity by nearly 150 times to 1.5 billion PCS by the end of 2016.

What alarmed Lee was Toshiba’s white LED technology relies on GaN-on-Si substrate technology it had acquired from U.S. manufacturer Bridgelux in April 2013. Bridgelux is a TSMC invested company, in other words Toshiba’s white LED technology is from TSMC. Toshiba could become a huge threat to Epistar if it successfully mass produces GaN-on-Si substrates and acquires pricing advantages.

Despite becoming a global LED die manufacturing leader after acquiring FOREPI last year, the company was still grappling with GaN-on-Si substrate technology and was mostly relying on the more costly sapphire substrates for its LEDs, according to an industry analyst. Despite having a negative outlook on GaN-on-Si substrates, Epistar had been working on the technology privately, but the results have been fairly disappointing.

Epistar’s 2-inch sapphire substrates are too small, and costs tend to soar as sapphire wafer sizes increase to 4” and 6”. Moreover, as wafers become larger yield rates tend to slide. TSMC SSL has mainly been developing GaN-on Si substrate technology, and is already mainly featuring 8” and 12” wafer products. Although, 8” GaN-on-Si wafers are smaller products from an older generation, it is already an unobtainable technology for most LED manufacturers. Epistar will be able to stay far ahead of competition if it enters GaN-on-Si substrate field early.

Hence, when market rumors indicated TSMC SSL was looking for a partner, Epistar began evaluating by acquiring TSMC SSL technology the company could reduce time spent and R&D costs required to develop the technology on its own.

Epistar Chairman B.J. Lee presented the acquisition proposal during a meeting with TSMC chairman Morris Chang. Since both are members of Academia Sinica, the two meet quite frequently. Lee’s proposal to acquire TSMC SSL equipment and investments was approved by Chang.

Lee sealed the deal to acquire TSMC LED subsidiary TSMC SSL on Christmas Eve 2014. The two parties signed a “Memorandum of Understanding on cooperation” to acquire TSMC SSL shares in exchange for the company’s technology and equipment.

Epistar will be acquiring 565.02 million TSMC SSL’s shares of the company at a price of NT$ 1.46 per share or equivalent to 94% stake in the company. The investment will be through a method acceptable by the two companies’ shareholders. With TSMC as one of Epistar’s largest shareholders, the company is expected to benefit from the manufacturer.

Epistar might hold an interim shareholder meeting in early 2015 to discuss the merger with TSMC SSL. The company will be issuing 20 million to 30 million new shares, roughly equivalent to NT $1.26 billion to NT $1.89 billion, based on its share prices on Dec. 26 of NT $63.1 per share to acquire TSMC SSL equipment and assets. TSMC SSL will also become an Epistar shareholder after the acquisition and have a 2% stake in the company. Epistar has declined to comment on the issue.