Shares of Elpida Memory Inc dropped as much as 19.6 percent on Wednesday on fears that rival computer memory firms in Taiwan could receive government support, which could worsen a chip supply glut.

Cash-strapped Elpida, the world's No.3 maker of dynamic random access memory, has been hoping that ones of its rivals would fail, lowering global chip output and propelling a sector-wide recovery in the first half of 2009.

The global economic slowdown is hitting the sales outlook for high-end PCs. Spot prices of DRAM memory chips have tumbled to around half the cost of making them, pulling chip manufacturers deeper into the red with each chip they produce.

Goldman Sachs downgraded Elpida to "neutral" from "buy" and cut its target price to 500 yen from 950 yen.

"If market mechanisms do not operate to weed out uncompetitive companies, this will prolong supply correction and put competitive companies at a disadvantage," Goldman Sachs analyst Ikuo Matsuhashi said in a note to investors.

Shares of Elpida, which closed down 13.4 percent at 350 yen, have shed 75 percent since the company announced a 50 billion yen ($515.4 million) moving strike convertible bond issue last month.

Its share price closed below the bond's minimum conversion price for the fifth straight business day, increasing the possibility that Elpida will redeem the bond.

That could mean Elpida will look to other financing methods or forego investment in new technologies to stay competitive against bigger rivals Samsung Electronics Co and Hynix Semiconductor Inc.

The firm, spun out of the DRAM operations at Hitachi Ltd and NEC Corp in 1999, could consider a private placement of new shares by strategic investors coupled with an investment in its factories, analysts said.

Investors Elpida might approach include former investor Intel Corp's investment arm Intel Capital, U.S. memory module maker and customer Kingston Technology Co and the Development Bank of Japan, they said.

Under the terms of the bond, if Elpida's share price stays below the bond's minimum conversion price of 509 yen through Dec. 11, then it could be forced to redeem the bonds to Nomura Holdings Inc by Jan. 10.

Elpida's 5-year yen CDS spread is around 1,000, with no virtual trading. A premium analyst said the spread is too wide, since the chip maker is not short of operating funds, but is merely seeking money for long-term growth..

TO SPEND OR NOT TO SPEND

Makers of DRAM, used mainly in computers, are under constant pressure to invest in new lines to lower unit costs to beat price falls and stay competitive.

But Elpida is weighing the pressure to grab market share and position itself for the next economic upswing against its growing losses, tumbling share price and dwindling cash.

Elpida's President Yukio Sakamoto has said that one option for the company is to delay spending plans, if its rivals do the same and chip demand remains weak.

"There's no telling what the global market will look like six months from now, and we will do our utmost to make sure we can alleviate what risks we can," said Elpida spokesman Hideki Saito.

Sakamoto and other executives at chip makers remain traumatised by the memory of losing their dominance to South Korean rivals in the 1990s, when they cut back on spending amid an economic downturn.

Elpida's creditors, which include Sumitomo Trust and Banking Co Ltd, Mizuho Financial Group and Mitsubishi UFJ Financial Group, have the right to demand accelerated repayment of loans totalling 110 billion yen, if Elpida's net assets fall below 75 percent of their value in the previous year at end-March.

But Elpida has said it may make its joint venture with Powerchip Semiconductor Corp a consolidated subsidiary in January-March, which would raise Elpida's net assets and help it clear the net asset covenant.

(Additional reporting by Chikako Mogi) ($1=97.01 Yen) Keywords: ELPIDA/ (mayumi.negishi@thomsonreuters.com; +81-3-6441-1812; Reuters Messaging: mayumi.negishi.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2008. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written