1999-02-26 ,
News Flash

Royal Philips Electronics announces that it has submitted a proposal to the Board of Directors of VLSI Technology Inc., a semiconductor company based in San Jose, California, with the objective of negotiating an agreement to acquire, in a merger transaction, all shares of VLSI at a price of $17 per share in cash.

"This proposed acquisition is consistent with our strategy of looking for acquisitions which strengthen the existing portfolio of the company, and also strengthen our presence in the United States," said Mr. Cor Boonstra, president and CEO of Royal Philips Electronics. "We are very excited about the opportunity to add VLSI and its outstanding design expertise and talented employee base as a cornerstone of our growth strategy for Philips Semiconductors in North America."

"With complementary products and almost no overlap, VLSI will be a platform for Philips Semiconductors' further expansion in the United States and an important element of our strategy to be a leading global supplier of communications and consumer semiconductor products," added Mr. Arthur van der Poel, CEO of Philips Semiconductors.

VLSI designs and manufactures custom and semi-custom integrated circuits for leading firms in the wireless communications, networking, consumer digital entertainment and computing markets. The company's 1998 revenues from continuing operations were approximately $550 million. VLSI has approximately 2,200 employees worldwide.

Philips employs 234,000 people worldwide, and over 3,000 people in Silicon Valley, where Philips Semiconductors has a primary design center.

Following this press release is a copy of a letter from Mr. Boonstra to Mr. Alfred Stein, chairman and CEO of VLSI, in which he outlines the Philips proposal.

Philips Media Relations Jeremy Cohen, tel. +31 20 5977213
Ben Geerts, tel. +31 20 5977215

Mr. A.J. Stein
Chairman & CEO
VLSI Technology Inc.
1109 McKay Drive
San Jose, CA 95131 February 25, 1999

Dear Mr. Stein,

Thank you for meeting with Arthur van der Poel and myself to discuss a possible strategic business combination between our companies. As you know from our recent conversations, Philips has for some time studied the possibility of a combination of our Semiconductors division and VLSI. Those conversations and our meeting today have convinced us that we should progress with our discussions on a fast time track. We have therefore summarized our proposal in this letter so that you can discuss it with your Board of Directors and advisors.

Based upon our work to date, which has been limited to public sources, Philips would propose to enter into an agreement to acquire VLSI in a merger transaction in which your stockholders would receive $17 in cash for each share of VLSI common stock.

We believe our proposal, which represents a premium of approximately 60 percent to the closing VLSI market price on February 25, offers an extremely attractive opportunity for your stockholders. Philips would propose to finance the transaction primarily through existing cash balances and thus would not require any contingency or delay traditionally associated with raising capital.

As we told you, we have the highest regard for your company and your employees, as well as your many innovations in the semiconductor field. We believe that the combined business of VLSI and Philips Semiconductors will be positioned as a global leader in many of the most exciting semiconductor growth markets. Furthermore, we are convinced that the strategic, operational and financial merits of such a combination are compelling and will provide significant benefits to your shareholders, employees, customers, and other stakeholders.

We plan to use VLSI as a cornerstone of our growth strategy for Philips Semiconductors in North America and as a platform for further expansion. As a result, we recognize that VLSI's management and employees are essential to the success of our proposed business combination. We are therefore very interested in discussing with you the ways in which we can properly offer incentives and retain those managers and employees.

As you can appreciate, with a proposal of this type, time is of the essence, and we are prepared to move accordingly. We would be happy to meet with you and other members of your Board of Directors, senior management and with your advisors as soon as practical to discuss our proposal and to answer any questions you or they may have. We believe it would be mutually desirable if you would give us the opportunity to conduct customary due diligence in parallel with the negotiation of a definitive acquisition agreement.

We realize that your Board of Directors will want to carefully consider our proposal, but we do ask that you get back to us with a response as soon as possible, but in no event later than the close of business on Wednesday, March 3.

We have discussed the highly sensitive nature of the market information contained in this letter with our legal counsel, Sullivan & Cromwell. Based upon those discussions, we have decided to publicly disclose our acquisition proposal.

I hope that VLSI will respond favorably to this proposal, and that a combination of our related businesses can be accomplished in an amicable and mutually beneficial fashion. We look forward to your response.

Sincerely,

Cor Boonstra
President & CEO
Royal Philips Electronics

cc: Board of Directors VLSI Technology Inc.