Financial services giant Citigroup (NYSE:C) is set to challenge Intel (NASDAQ:INTC) for dominance of the semiconductor industry. Well, sort of.

Three years ago, South Korea's Hynix Semiconductor was heavily indebted to some 16 banks and 190 creditors in the midst of the worst industry downdraft ever. When prices of dynamic random access memory (DRAM) chips imploded, tumbling nearly 90% in 2001 with the bursting of the tech bubble (at one point prices dropped below $1 a chip), the manufacturer was tottering on the edge of bankruptcy. Creditors took over the company by converting into equity some of its massive $6.3 billion of debt and then announced they wanted to unload its non-memory chip operations. Memory chips account for 80% of Hynix's revenues, and it is the second-largest memory chip maker in the world, behind Samsung and ahead of Micron Technologies (NYSE:MU), which had once considered acquiring Hynix, and Infineon Technologies (NYSE:IFX).

Citigroup's venture capital arm initially bid $347 million for the operations, but in the wake of the recovery underway in the semiconductor industry, the finance company upped its bid to $828 million. Bank tellers will now be making chips for flat-panel displays and camera-equipped mobile phones while also taking your deposits.

The semiconductor recovery lifted a lot of boats in 2004, which will be remembered as a record-breaking year. When Tom Engle and I recommended FormFactor (NASDAQ:FORM) for Tom Gardner's Hidden Gems newsletter it was in recognition of this return to health for the industry. FormFactor manufactures cards that test memory chips to ensure they're working properly, and industry growth eventually falls to this "picks-and-shovels" company's bottom line.

Citigroup's new venture will be called MagnaChip Semiconductor Ltd. and will seek to trade its shares on an as-yet-undisclosed U.S. stock exchange. The company controls five wafer fabrication facilities in Korea with a production capacity of 110,000 wafers a month. It also has more than 15,000 patents in its portfolio and is expected to have $1 billion in annual sales, placing it at about 35 on the list of the world's largest chip companies. Among its customers are NEC Corp. (NASDAQ:NIPNY), LG Electronics, and Sharp.

This launch also leaves Hynix in much better condition. It has 17% market share in DRAM memory, operating margins have increased to 40%, and it has boosted the average selling price of its diverse product line to $6.20.

Despite mixed signals over the immediate future of the semiconductor industry -- It's up! It's down! It will be trading sideways for a while! -- Citigroup has an industry contender on its hands and will now make change using wafer chips.

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Fool contributor Rich Duprey coulda been a contender. He recommended FormFactor for Hidden Gems and owns shares in it but does not own any of the other stocks mentioned in this article.