Does this deal make sense? No, according to one analyst. The merger of NEC Electronics and Renesas would have a dominate position in microcontrollers (MCUs), but there would be huge integration issues, according to an analyst.

Renesas was ranked as the world's sixth largest IC vendor with $7.017 billion in sales in 2008, according to iSuppli Corp. NEC ranked 11th with $5.826 billion in sales last year, according to the firm. In total, the merger would result in a company with over $12.8 billion in sales, putting it in third place behind Intel Corp. and Samsung Electronics Co. Ltd.

Renesas and NEC were the world's first and third largest MCU vendors in 2008, respectively, according to Databeans Inc. Renesas had 20.1 percent share in 2008, while NEC had 9.7 percent, according to the firm.

Renesas also makes analog products, system-on-chip (SOC) devices, wireless ICs and others. NEC Electronics makes ASICs, consumer chips and other products.

''Merging with NEC's MCU operations would give this one vendor an unheard-of 30 percent market share of microcontrollers in a market where the biggest of 30 vendors barely trip into double-digit market shares,'' said Tom Starnes, an analyst with market researcher Objective Analysis.

''Although there may indeed be merger talks between Renesas and NEC, we see little of the traditional benefits from a prospective merger between these two firms,'' Starnes said in a report. ''It is no small chore to gain a benefit from the merger of two large microcontroller vendors.''

There are more negatives than positives in such a deal. ''Considering the broad offering of today's Renesas as well as NEC, most of the products seem to overlap rather than provide new synergies,'' he said. ''Without paring down of overlapping families, it will be difficult to provide much financial gain.''

There are other problems. ''Manufacturing costs can be improved by driving more chips through the fabs, but first any newly-acquired chips have to be reconfigured for the new process node in the fab -- a very resource-intensive effort. Two companies cannot just be slapped together and see immediate, or even short-term financial benefits,'' he argued.

Still, some observers believe that a merger between Renesas and NEC Electronics could take place this year. Both companies are in deep trouble, and can no longer operate as stand-alone entites amid the current IC downturn.

Toshiba Corp., which recently said it may spin off its system and discrete chip operations, is reportedly in discussions to combine its system chip business with NEC Electronics. Toshiba has denied those rumors.

Toshiba and NEC Electronics have close ties in process development. But Toshiba has its own share of problems and losses. NEC Electronics would simply compound Toshiba's problems.

In other words, Renesas and NEC Electronics have no where to hide and may be forced to merge. But if such a deal goes through, look for massive layoffs and fab closures.