It is increasingly shaping up to be an open brawl reminiscent of Microsoft's (MSFT) attempt to take over Yahoo (YHOO). South Korea's Samsung Electronics has released to the public its letter sent on Sept. 16 to the board of directors at SanDisk (SNDK) expressing deep disappointment over a delay in its $5.85 billion cash offer for the U.S. flash memory-card maker.
Shortly after Samsung disclosed the proposal, SanDisk issued a statement saying its board "unanimously rejects" the offer (although it did not rule out a deal at a better price). Samsung officials say the company is frustrated with four months of unproductive negotiations, so Samsung is going straight to shareholders with a price of $26 a share—an 80% premium to its Sept. 16 close and a whopping 93% premium over SanDisk's closing stock price on Sept. 4, when a Korean daily reported that the two were in talks for a possible acquisition (BusinessWeek.com, 9/5/08).
Now the stage is set for a public debate on pricing and benefits for parties involved. "Like in the Microsoft-Yahoo case, shareholders could start putting pressures on the SanDisk board to hammer out an acceptable deal," says Michael Min, technology specialist at fund manager Tempis Capital Management. "A compromise could well be arranged as some shareholders find it a good time to exit the market in the face of the slumping flash-chip market."
Industry watchers see Samsung's move as an important step in its strategy aimed at cementing its leadership in the NAND flash chips used in storing data for music players, digital cameras, and handsets. SanDisk has hundreds of patents in the U.S. and overseas, and technologies to pack data storage space in multilayers in a single chip. Samsung, the No. 1 flash-chip maker with more than 40% market share, pays SanDisk some $400 million annually to license those patents.
The technologies are crucial as Samsung prepares to ramp up its production of so-called solid-state drives (SSD) that could replace hard drives in computers for storing data. "SSD will be the most important application for flash chips in the future and a Samsung-SanDisk combination could expedite the arrival of its mass market by bringing down costs dramatically through technological innovation," says Jay Kim, semiconductor analyst at brokerage Hyundai Securities in Seoul.
An SSD has several advantages over a hard drive. While a conventional hard drive stores data on a magnetic disk that spins at up to 7,200 rpm, the SSD is a chip-set without a moving part. That makes it faster, less vulnerable to shocks, and less demanding of energy. It also enables notebook PC makers to bring out lighter and smaller laptops.
Price Gap Narrows
The main barrier for the mass adoption of SSDs has been their high cost. Although the price gap between hard drives and SSDs has narrowed dramatically in recent years, an SSD is still more than five times as expensive as an alternative hard drive now. Industry officials hope the gap will shrink to three times by the end of next year and two times by 2010. Market researcher iSuppli figures PCs will account for about a third of NAND chip applications in 2011, from less than 3% this year, while the chip's market size will rise to $28 billion in 2011 from $15 billion.
SanDisk founder and chief executive Eli Harari says Samsung's offer does not reflect the value of the "substantial synergies" that the Korean company can attain from an acquisition. "We believe Samsung's proposal does not provide appropriate value to our stockholders and is opportunistically timed at the trough of an industry-wide downturn," Harari said in a letter to Samsung CEO Lee Yoon Woo. Lee says the Milpitas (Calif.)-based company "continues to cling to unrealistic expectations on both its standalone market value and an appropriate merger price."
Samsung spokesman James Chung says his company has not yet made any decision on whether to raise its bid. But analysts say Samsung could decide to buy a majority stake instead of making an outright buyout, and increase the per-share price. "I think the pricing difference could be bridged," says Park Kyung Min, chief executive at fund manager Hangaram Investment Management.
What Will Toshiba Do?
So, what would a Samsung-SanDisk alliance do to the NAND industry's No. 2 player, Toshiba? The Japanese tech company had nearly 28% market share in the second quarter of this year. Its success has partly come thanks to a collaboration with SanDisk that dates back to 1999. (They formed the first of their production joint ventures in 2000.) Toshiba (6502.T) benefits from SanDisk's research expertise in the field and access to its patents, which other companies pay steep royalties to license.
But few analysts think Toshiba will risk a bidding war with Samsung. One reason: Just two years ago, Toshiba spent $5.4 billion acquiring Westinghouse Electric to expand its business in building nuclear reactors. Another multibillion purchase so soon after the Westinghouse deal hardly seems likely. A Toshiba spokesman declined to comment.
And letting Samsung grab SanDisk might be a plus for Toshiba. Samsung isn't necessarily Toshiba's biggest threat. Up-and-comers Hynix Semiconductor, Micron Technology (MU), and Numonyx are more likely to erode Toshiba's market share than Samsung, says Macquarie Securities analyst Damian Thong.
Three-Way Deal Possible
Recently, SanDisk said it would be scaling back its capital expenditures over the next two years. That's likely to stick Toshiba with a bigger chunk of the bill to run their jointly owned chipmaking fabs, in Yokkaichi, western Japan. If Samsung bought SanDisk, the Korean giant would have two choices: Invest more in SanDisk's ventures with Toshiba or pay Toshiba to break off the arrangement. Either way, it could mean less spending for Toshiba, which could use the money to fund the two new NAND plants in Japan it hopes to build next year and have online by 2010.
There's even a possibility that Samsung might consider a three-way cross-licensing deal that would do away with royalty payments altogether, says Thong. The three might share the supply of chips but compete on a product level, something Samsung already does with Sony (SNE) in the liquid-crystal-display panels for flat-panel TVs. A similar arrangement in NAND chips, though, would face scrutiny from antitrust authorities.