Micron must avoid integration pitfalls now that Elpida deal is done

July 25, 2012 — Micron Technology Inc. (MU) is more than doubling its dynamic random access memory (DRAM) manufacturing capacity by buying bankrupt Elpida Memory’s assets. But the move is “not without risk,” according to IHS.

Micron’s DRAM production volume will grow to approximately 370,000 wafer starts per month over the long term, up 131% thanks to the purchase. Micron will move past Hynix Semiconductor (300k WSPM) in the DRAM maker standings, falling behind only Samsung Electronics (400k WSPM) for market share.

Based on Q1 rankings, Micron’s Elpida acquisition will boost its standing to 24.8% share of the DRAM space, behind Samsung’s 40.8% and ahead of Hynix’s 24.2%.

Figure. Global DRAM forecast, wafer starts per month, before and after Micron’s purchase of Elpida. SOURCE: IHS iSuppli Research, July 2012.

With all this opportunity, the risks are present. “Integration could prove challenging or even messy if details are not worked out carefully enough,” said Mike Howard, senior principal analyst for DRAM & memory at IHS. Howard points to past memory company acquisitions by Micron — Numonyx and Inotera — that “presented unanticipated surprises,” which Micron is still “digesting.” Elpida could just pile on more challenges to the complicated integration process that Micron is involved with for these companies. Technology transfer from Elpida could be costly and take significant time, Howard says.

IHS considers the purchase price of the Elpida transaction, the way payments will be made and how the payments will be funded, to be worthy of analysis. The total purchase cost is $2.5 billion, of which $750.0 million is to be paid in cash. The cash portion of the payment is intended for Elpida assets and will be due at the close of the deal, expected sometime in 2013. The cash payment won’t necessarily reduce the cash balance of Micron, as it will gain access to all of Elpida’s cash and current assets on the bankrupt company’s balance sheet. Elpida at the end of December 2011 had approximately $1.4 billion in assets.

The balance of $1.75 billion will not be paid until December 2014 through 2019, and is paid out in interest-free installments, which benefits Micron.

The deal also calls for the payments to come from the free cash flow of a restructured Elpida, which will now turn into a Micron subsidiary. If Elpida is not cash-flow positive in its new role as Micron offspring, then no payments will have to be made by the parent company.

Concurrent to its Elpida acquisition, Micron spent $330 million to buy out Powerchip Semiconductor’s minority interest in Rexchip Electronics, in which Elpida had majority two-thirds share. Micron now holds 89% ownership share of Rexchip, which has a cost competitive, leading-edge manufacturing plant in Taiwan.

Read more of IHS iSuppli’s analysis in Micron Continues Role as DRAM Consolidator

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