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Dell, Samsung ink $8.5 billion deal

Dell agrees to buy $200 million in Samsung bonds, ensuring a stable supply of flat-panel displays from the South Korean company in a five-year, $8.5 billion contract.

SEOUL, South Korea--Dell Computer, the biggest direct-seller of personal computers, will invest $200 million in Samsung Electronics in return for a stable supply of flat-panel displays, the South Korean company said.

Round Rock, Texas-based Dell agreed to buy $200 million of Samsung bonds convertible to shares beginning in October, 2000. Simultaneously, the U.S. company signed a contract to buy a supply of flat-panel displays from the South Korean firm worth about $8.5 billion over the next five years.

Samsung, the world's largest computer memory chipmaker, will use the proceeds from the bond sale to add production lines for bigger TFT-LCDs--thin film transistor-liquid crystal displays--and upgrade existing plants, said Cho Sungin, a Samsung spokeswoman.

Dell's investment mirrors long-standing concerns about a shortage of TFT-LCDs, which are widely used in laptop computers, television sets, and other multimedia equipment. The worries became more acute after electronics firms in Taiwan, a major exporter of displays, suffered damage and production halts as a result of last month's devastating earthquake.

Dell, which derives almost a quarter of its sales from notebooks, is not the only computer maker feeling the squeeze, analysts said. Three months ago, Apple Computer bought $100 million of convertible bonds from cash-rich Samsung to ensure a commitment for an undisclosed quantity of LCDs.

"The outlook for the TFT-LCD market can't be better," said Shim Yong Jae, an electronics analyst at SG Securities. "Dell's investment reconfirms the industry trend, which will benefit leading LCD suppliers such as Samsung."

Shim rates Samsung shares a "strong buy," forecasting the stock will gain about two thirds its value within 12 months.

Expansion plans
Samsung Electronics, gearing up for stronger demand, plans to crank up LCD production capacity in the coming years.

The flagship unit of Korea's second largest conglomerate, Samsung Group, said it will be able to produce 480,000 13.3 inch-equivalent TFT-LCDs a month by the end of this year and a further 700,000 LCDs next year.

"Even as we fully utilize LCD capacity, our supply is still falling short of fast-growing demand," said Cho. "We plan to invest more, as the trend is expected to last throughout the year 2000."

Samsung's new plant, its fourth, will begin operations in 2001 and will be equipped with lines capable of making six 17-inch TFT-LCDs from one 730 millimeter by 920 millimeter substrate. Analysts said it will be the first attempt to use a substrate of that size to produce TFT-LCDs.

Samsung expects sales of high value-added TFT-LCDs, which account for less than 10 percent of total sales, to rise two and a half times to $2.1 billion this year from a year ago.

Windfall earnings
Bigger demand for flat-panel displays is one of a number of factors expected to produce record profit this year for Samsung. The electronics firm's net profit jumped almost nine-fold to about $1.1 billion in the first half from a year ago.

The company now expects net income of about $2.5 billion for the full year, exceeding the previous high of $2.08 billion in 1995.

Even though Samsung is able to generate a hefty amount of cash, it raised another $200 million from Dell to keep its biggest LCD importer happy, analysts said.

The convertible bonds, which have a maturity of 39 months, yield annual interest of 5 percent. Dell can exchange the bonds into common shares or depositary receipts at a price of $216.22 per share--a 28 percent premium to today's closing price.

"It looks like a favor for Dell, because Samsung already has more than enough cash on hand," said Shim. "Anyway, the deal is a win-win for both companies."

Samsung Electronics shares, up four-fold in the past three months, advanced 4.4 percent in Korean trading, after having fallen for the past three trading days.

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