Taiwan's Chi Mei agreed to be merged with Innolux through a share swap worth about $1 billion to create a new company that aims to have a stronger foothold in the highly competitive LCD industry dominated by bigger Korean rivals.

In a hastily-called news conference on Saturday, the two LCD companies said Innolux Display will be left as the surviving company and the new company, named Chimei Innolux Corp, aims to be among the world's top three LCD makers.

The merger was the latest alliance in Taiwan's LCD industry, where smaller companies are trying to boost their economic scale to compete with the world's two biggest LCD makers Samsung and LG Display in South Korea.

I would expect to see synergy effects between the two companies, said Robyn Hsu, a fund manger at Taiwan's Capital Investment Trust.

Innolux has been focusing on the LCD monitor sector and they can broden the product portfolio to include TVs and notebook PCs from Chi Mei after the merger.

But it won't have an imminent impact on the supply side in the whole LCD market because Innolux has been doing a lot of assembly works.

Aanlysts say the new entity is also well poisitioned to gain a bigger share in the fast growing LCD market in China, which research firm DisplaySearch said could overtake North America as the world's biggest LCD TV consumer in 2011.

Chi Mei, which trails only AU Optronics in Taiwan and is the world's No.4 LCD maker now, has said it expects to supply 40 percent of panels needed by LCD TVs with Chinese brand names, tapping the potentially huge China market.

VAST CHINA MARKET

Major companies in the sector have been flocking to China with blueprints of new LCD plants to take advantage of its market.

Terry Gou, chairman of the Hon Hai group in which Innolux is one of its units, told the news conference that the new company would build LCD plants on the mainland, but did not say how many factories will be built.

Under the term of the deal, both companies have agreed that each 2.05 Chi Mei Optoelectronics shares will be exchanged for one Innolux share, and the merger is likely to take effect in May next year, the companies said.

The combination of the two companies would create significant synergies in integrated supply chain management, streamlined operation, great economy of scale, and complementary customer base, the companies said in a statement.

In early 2006, AU Optronics, the world's No.3 LCD maker, acquired smaller local rival Quanta Display. AU also was created by a merger between Acer Display and Unipac Optoelectronics, a LCD unit of the UMC group, about a decade ago.

Before the announcement, Chi Mei shares closed up 4.4 percent on Friday. The stock has shot up nearly 10 percent in the past two sessions amid speculation of tie-up with other LCD makers.

Innolux shares were unchanged on Friday, while the main TAIEX share index fell 0.07 percent.

(US$1=T$32.3)

(Additional reporting by Roger Tung, Editing by Ron Popeski)

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