Samsung, SanDisk retreat from M&A…but maybe later?

Oct. 22, 2008 – Citing “uncertainties” in recent moves by its intended target, Samsung has taken away its $26/share (~$5.85B) buyout offer for SanDisk, which responded by questioning its suitor’s motives in the first place. Analysts suggest there are still compelling factors to support such a combination, though current market values create too big a gulf to cross.

In also posted publicly (is anyone getting tired of having these things play out on newswires lately? Neither are we!) laid blame on Samsung’s doorstep, claiming the firm never responded to what SanDisk says it submitted, an outline of “a clear path to hold further discussions.” The firm then called into question “the real motivations behind Samsung’s offer.”

In their defenses/accusations, both sides cited a need to represent their respective shareholders’ interests — and that’s the key element in this soap opera (and indeed just about every negotiation for industry M&A), and could be the reason it might eventually be resurrected, according to analysts.

“We continue to see significant benefits to Samsung should the company re-ignite its interest in SNDK, both from an IP consolidation and industry capacity consolidation standpoint,” says Doug Freedman with American Technology Research, in a research note. “We believe that a deal of some sort (likely favorable to SNDK shareholders) will manifest itself” before a patent license deal between the firms expires in August 2009. The company’s technology license ties to partner and Samsung rival Toshiba (e.g. 3D/Matrix and X4 technology), rather than any recent corporate actions such as the aforementioned asset sale to Toshiba, are likely behind Samsung’s M&A pullback, he writes.

The financial markets also are playing a big factor in the M&A meltdown. Acquiring SanDisk would help Samsung immensely given its technology licenses to SanDisk, estimated at ~$200M/year (and would also take in the ~$200M-$300M in SanDisk royalties from other firms). But Samsung also has a responsibility to shareholders not to overpay for that benefit — and it surely noticed how jittery investors were after the SanDisk/Toshiba capacity sale was publicized, sinking SanDisk shares to ~$14 from ~$16, notes analyst Jim Handy with Objective Analysis, in a research note. “Keep in mind that the initial offer by Samsung made SanDisk’s price jump from $13.50 to $21,” he points out. “It appears that most traders feel that SanDisk’s value without Samsung is far lower than it is with Samsung.” And investors who “saw Monday’s Toshiba deal as a bad sign are likely to read Samsung’s most recent announcement as something far worse.” So it’s in Samsung’s interest to play this card, and try to get a SanDisk M&A deal done for a “fair” (read: lowest possible) price.

On the other side of the coin is SanDisk, which knows the leverage it has with its technology patent licenses, viewed as key to new chip/memory technologies not just to Samsung but others as well — and Samsung and everyone else knows it. So, SanDisk likewise has an obligation to shareholders not to cave in and to try to get “a price that accurately reflects not current market conditions, but the value of the company over the long term,” Handy writes.


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