Sept. 7, 2008 – With rumors swirling that top memory firm Samsung Electronics is sniffing around SanDisk, the game is on to determine just how high are the stakes for the memory industry, particularly the one company who would be hurt most.
The basics of the deal first came to light on Friday, with word circling around the newswires (e.g., Associated Press and Bloomberg, most citing Korean online news site EDaily that the South Korean giant was “looking at various opportunities” regarding the US-based firm, and had even retained JP Morgan to assist negotiations. The Korea Times cited an unidentified source saying the bid would be a combined 40% SanDisk shares owned by 10 private equity funds priced at 1.5T won (US $1.37B).
Samsung is tops in global market share for NAND flash (~42%), ahead of Toshiba (~27%) and Hynix (~13%). But analysts suggest it also pays hundreds of millions of dollars in licensing fees to SanDisk, so it could be looking to shut off that faucet of funds, though whether a surmised pricetag of $3B (SanDisk’s current market cap) is the answer. However, most reports seem to agree that Samsung’s move is strategic for technology reasons — an effort to get its hands on technology relevant to 3D memory chips, which would be a point of competitive advantage for SanDisk (and its JV partner Toshiba).
Such a deal would meet significant hurdles, notes a quartet of analysts cited by Barrons blogger Eric Savitz:
– Citigroup’s Craig Ellis thinks the addition to Samsung’s manufacturing share (to a total of 54%) would be one of the antitrust concerns, and muses that Samsung may just be on “a due diligence fishing trip” before renegotiating its royalty rates next year.
– Cowen’s Daniel Berenbaum wonders whether SanDisk “is a willing seller” at all, noting that a tieup with Samsung would likely affect its major manufacturing partnership with Toshiba, and that Samsung has not had much experience with big international M&A.
– Goldman Sachs’ Jim Covello thinks the deal actually does make sense from a royalty standpoint — he estimates the fees add up to $4B-$5B, vs. SanDisk’s $3B market valuation — and Samsung also would get its hands on royalties for the same patents as paid by Hynix and potentially Micron. However, he also wonders about the complication of the Toshiba JV, which could include compensatory clauses with any change of ownership.
– Merrill Lynch’s Alan Yu also muses about change-of-ownership issues, which he says would affect SanDisk’s 1% convertible notes due in 2013, allowing holders to demand payment at par plus accumulated interest.
Toshiba and SanDisk formed their JV in 1999, and now control a 27.5% NAND flash market share. Toshiba built a fab for the JV in Mie Prefecture and has earmarked ¥1.7T (US $15.78B) for two new NAND flash plants, with construction starting in spring 2009; at least one of the sites will be jointly operated.
The part of their partnership targeting 300mm manufacturing, “Flash Alliance,” is projected to be one of the few major capex spenders in 2008, though the two are ramping down 200mm flash memory output.
Japan’s Nikkei daily paper noted that Toshiba posted its first net loss in three years in the June quarter, in large part to still-slumping NAND pricing. If customer SanDisk ties up with Samsung (and has previously sought other NAND sources. e.g. Hynix), Toshiba could suffer even greater losses.