SanDisk Corp. stuck to its guns in rejecting a $5.8 billion, $26-per-share takeover bid by Samsung Electronics Co. Ltd.
SanDisk, the Milpitas, Calif.-based maker of NAND Flash memory – included to a degree on nearly all handsets and used in removable memory cards critical to the handset industry – cited discussions with shareholders who, the company said, felt the bid undervalued their company.
Meanwhile, analysts discounted the possibility that Toshiba, which has partnered with SanDisk on NAND Flash production, would make its own bid, according to a Barron’s report. Toshiba recently cut its forecast for sales and profit for its fiscal year that ends at the end of March 2009 and could have trouble raising capital.
What’s driving Samsung’s interest?
Samsung’s largest single division is in semiconductors, with a huge devotion to D-RAM memory chips for PCs and combination S-RAM/NAND Flash for handheld consumer electronics. Samsung and other players have overbuilt production capacity, prices have dropped and the NAND Flash business offers a bright future, analysts said.
Also, Samsung and SanDisk have been negotiating a cross-licensing agreement governing Samsung’s access to SanDisk’s NAND Flash intellectual property, which analysts peg at between a $350 million and $1 billion annual cost for the Korean industrial conglomerate. A hostile tender offer such as Samsung made last week might help its leverage in cutting a favorable new cross-licensing agreement, according to several analysts.
“So an acquisition by Samsung here would provide it with a larger stake in the memory market and help cut its IP costs,” said analyst Daniel Longfield at Frost & Sullivan. “It would also speed time-to-market for new memory solutions in Samsung’s myriad product lines.”
NAND favored
The market, including handsets and other portable consumer electronics, is rapidly embracing NAND Flash as a smaller, lighter, more durable format for memory than previous alternatives, Longfield said.
“The company that can bring Flash to market at close to solid-state memory prices will make a fortune,” he said. “SanDisk’s gamble is that Samsung is willing to pay more. We’re only in the first chapter of this deal.”
How big a fortune awaits the winner in NAND Flash technology?
NAND Flash in mobile phones alone this year will be worth $9 billion, according to Will Strauss, principal at Forward Concepts, a semiconductor research firm. That is projected to grow at a 38% annual clip to $12 billion by 2012, Strauss said, far outstripping NAND Flash demand in general, which hovers around the 5% annual growth rate. With Samsung’s position as the world’s second-largest mobile-phone maker, the sky may not be the limit.
Multiple suitors
A SanDisk acquisition would also provide Samsung with a clear path to established retail channels, via SanDisk’s current customer base and its consumer-facing brand position in the removable memory market, added analyst Len Jelinek at iSuppli Corp., which studies consumer electronics components.
Another possible suitor, according to Jelinek: U.S.-based, hard-disc drive maker Seagate Technology, which has an eye on future technologies and might more easily pass muster with U.S. regulators concerned about Samsung’s hegemony in the NAND Flash market.
Last Thursday, Samsung publicly released a letter ostensibly addressed to SanDisk’s board – but clearly aimed at the company’s shareholders – that expressed “deep disappointment … (that) SanDisk continues to cling to unrealistic expectations on both its standalone market value and an appropriate merger price. This ($26 cash per share) offer is full and fair and we believe that, if given an opportunity, your shareholders would agree.”
SanDisk CEO Eli Harari publicly rebutted the offer by stating that Samsung was making an “opportunistic attempt to take advantage of SanDisk’s current stock price,” depressed due to the cyclical nature of its industry, and in an atmosphere of uncertainty attending negotiations between the two companies over an IP cross-licensing agreement.
“We believe Samsung’s proposal does not provide appropriate value to our stockholders and is opportunistically timed at the trough of an industry downturn,” Harari added.
The next day, SanDisk’s stock soared nearly 40% in midday trading to $21.10, well above its 52-week low but still below Samsung’s offer. The stock continued to make less dramatic gains at week’s end.
Forward Concepts’ Strauss said that Samsung was making a canny offer at tough juncture for SanDisk, but that the latter had good reasons to hold out.
“(SanDisk) thinks its future is bright and it’s in a hot, growing market,” Strauss said.
