Oct. 22 (Bloomberg) -- Samsung Electronics Co., the world's second-largest maker of semiconductors, scrapped a $5.85 billion offer to buy SanDisk Corp., saying losses at the U.S. company may worsen as a glut forces chipmakers to cut prices.

Samsung withdrew its $26-a-share cash offer after failing to make ``meaningful progress'' over six months, Chief Executive Officer Lee Yoon Woo said in a statement today. Milpitas, California-based SanDisk has fallen 34 percent to $14.76 on the Nasdaq Stock Market in the past month after spurning the bid.

Lee walked away from what would have been the company's biggest acquisition and the chance to widen Samsung's lead over Toshiba Corp. in the $15 billion market for memory chips that store songs and pictures in electronics. The move may increase pressure for SanDisk Chief Executive Officer Eli Harari to boost shareholder returns after the stock fell 56 percent this year.

``There's no reason for Samsung to stick to their previous bid for SanDisk given the current environment,'' said Kim Hyung Chan, a fund manager at Seoul-based KTB Asset Management Co., which has $3.3 billion in equities. ``This decision won't deal much of a blow to Samsung.''

Samsung, based in Suwon, South Korea, fell 2.1 percent to close at 508,000 won in Seoul. Toshiba, which has a chip- manufacturing venture with SanDisk, lost 5.1 percent on the Tokyo Stock Exchange.

Raising Questions

The withdrawal ``raises questions about the real motivations behind Samsung's offer,'' SanDisk, the world's biggest maker of memory cards, said in a statement. Samsung ignored SanDisk's ``clear path to hold further discussions,'' the U.S. company said.

SanDisk on Oct. 20 reported a second consecutive loss after an industry glut drove down flash memory chip prices.

``We squarely face the growing uncertainties in your business, which may continue to deteriorate in this difficult economic environment and further impact your standalone value,'' Lee, who became Samsung's chief in May, said in an open letter to Harari. SanDisk's results ``serve only to illustrate this risk.''

Samsung's statement comes two days after Toshiba said it agreed to buy 30 percent of production capacity at its venture with SanDisk to get cheaper access to manufacturing equipment. The companies, which jointly own two factories in Yokkaichi, Japan, will split the remaining 70 percent of the output.

``The withdrawal of Samsung's bid is a definite plus for Toshiba as it removes one negative risk at its chip business,'' said Yuichi Ishida, an analyst at Mizuho Investors Securities Co. in Tokyo. ``Toshiba can still benefit from acquiring output from SanDisk as it will help bolster the company's capacity and ability to react to market fluctuations.''

Risk Profile

The agreement with Toshiba worsens SanDisk's ``risk profile and a material deterioration in value,'' Samsung's Lee said. Keisuke Ohmori, a Tokyo-based spokesman at Toshiba, declined to comment.

``Toshiba's involvement may have made the acquisition technically more difficult and a delay in the recovery of the industry probably affected Samsung's decision,'' Seo Won Seok, an analyst at NH Investment & Securities Co. in Seoul, wrote in a note after the announcement.

Moody's Investors Service today cut outlook on Toshiba's A3 rating, its seventh-highest investment grade, to negative from stable. Toshiba's plan to buy the production capacity may increase the chipmaker's business risk in the volatile memory market, Moody's said in a statement.

Better Off

``Toshiba would be better off if it bought SanDisk,'' said Mitsushige Akino, who oversees about $468 million at Tokyo-based Ichiyoshi Investment Management Co. ``Only those who invest and remain on top or second position can survive.''

Samsung may revive its pursuit of SanDisk ``at a later date'' because of the appeal of the U.S. company's patents, Robert Lea, a Seoul-based analyst at UBS AG, wrote in a report today. Still, Lea applauds Samsung's decision to step back and reconsider, Lea wrote.

``We withdrew our offer and there should not be further room for speculation,'' Chu Woo Sik, head of Samsung's investor relations said today.

Samsung publicly disclosed its offer last month after receiving a Sept. 15 rejection letter from SanDisk's Harari. Samsung initially indicated it would be willing to pay a ``significant'' premium to the $28.75 per share price on May 22, when it first approached the U.S. company, SanDisk said then.

Samsung had a 42.3 percent share of the NAND flash memory- chip market in the second quarter, compared with Tokyo-based Toshiba's 27.5 percent and Hynix Semiconductor Inc.'s 13.4 percent, based on estimates from iSuppli Corp. Industry sales will probably rise 9 percent this year to $15.2 billion, according to the El Segundo, California-based research firm.

Prices of the benchmark NAND flash memory have slumped 55 percent this year because of a glut, according to Dramexchange Technology Inc., operator of Asia's biggest spot market for chips. The outlook for the NAND industry may be worse six-to-nine months from now, according to a Sept. 8 UBS report.

To contact the reporter on this story: Kevin Cho in Seoul at kcho2@bloomberg.net

Last Updated: October 22, 2008 02:05 EDT