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Infineon Loses a Winner

By W.D. Crotty
March 26, 2004
Shareholders of the world's No. 6 chip maker, Infineon Technologies (NYSE: IFX), had to be shocked to hear that their 45-year-old CEO resigned "for personal reasons." After all, Ulrich Schumacher had just pulled the world's third-largest DRAM maker through billions of cost cutting and straight to profitability.

The company responded with a conference call hosted by a trio of top executives. All refused to comment on the nature of a special board meeting that led to the CEO's departure other than to say it was a "review of [the] current business situation." Basically, they said there would be no change in strategic direction, and that there were no issues with accounting, the balance sheet, or current performance.

Although the management team appears otherwise intact, you have to wonder at the loss, not to mention how the company will perform with a temporary CEO.

Infineon's business is increasingly partnership-oriented. There's a joint venture with IBM (NYSE: IBM) to develop MRAM (magnetoresistive random access memory). Then there's a strategic semiconductor development partnership to focus on 65- and 45-nanometer process development with IBM, Samsung, and Chartered Semiconductor Manufacturing (Nasdaq: CHRT). Relationships like these are managed at the CEO level.

There is also an ugly patent dispute with Rambus (Nasdaq: RMBS). It seems less likely that a temporary CEO will manage to finagle an out-of-court settlement to get this case, and its rumored $40 million a year in royalty payments, behind the company.

Since being spun off from German industrial giant Siemens (NYSE: SI) in 1999, Infineon has had only one CEO -- a young, dynamic leader with a strong vision and a stronger personality. The company will struggle to find an equally dynamic leader capable of the cost cutting required to make Infineon a world-class semiconductor company.

Yet the stock, even after the CEO tumult, trades about where it opened the week -- up roughly 85% for the past 52 weeks. Cleary, the return to profitability is appreciated, as well it should be. Still, at an above-market 34 times estimated 2004 earnings, further upside will likely be hampered by the leadership overhang. At least for now.

Interested in discussing semiconductors or Infineon with other investors? Try The Motley Fool's Nanotechnology discussion board.

Fool contributor W.D. Crotty does not own any of the stocks mentioned, although he is following the MRAM race.

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