Micron Has Better Options Than a Cheap Bid From China

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Will U.S. Allow a China Micron Buyout?

Turning down a $23 billion takeover offer would be a good move for Micron Technology Inc.

That’s how much Tsinghua Unigroup Ltd., the state-owned investment arm of one of China’s top universities, is planning to offer for the U.S. chipmaker, according to a person familiar with the matter.

At $21 a share, Tsinghua would be paying just 4 times Micron’s earnings before interest, taxes, depreciation and amortization in the last 12 months. Only one company has done a big semiconductor deal for cheaper, and it was Micron -- in the company’s 2013 takeover of Elpida Memory Inc. out of bankruptcy.

“It’s an extremely low-ball bid,” Srini Sundararajan, an analyst at Summit Research Partners, said in a phone interview. “I think they’re using this as a trial balloon to see how everybody reacts.”

Not only is the proposal almost 75 percent lower than where the stock was trading in December, it’s also 40 percent below where analysts had seen the stock going on its own in the next year. On Tuesday, the stock closed in New York at $19.61.

That’s not to say Micron should command the top valuation. It’s had its share of issues: The market for personal computers, the biggest use of its memory, is shrinking. That’s caused prices to fall and crimped profit: Micron has lost money in four of the last eight years.

But recently, some -- including shareholder David Einhorn of Greenlight Capital Inc. -- see potential for a turnaround as consolidation helps stabilize prices.

Better Prospects

Micron should be valued at about $33.75 a share based on the valuations of peers and analysts’ forecasts for better results, said Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried & Co.

Any buyer would then probably have to pay a premium on top of that, in part to compensate for tax benefits that Micron acquired through the Elpida takeover, he said.

“My point is, potentially $21 doesn’t even compensate for what it should be worth on a stand-alone basis, let alone on a takeover basis,” Shah said.

In a letter to investors released Monday, Einhorn said that Micron will be worth more than Netflix Inc. at some point over the next few years. The streaming service has a market value of $43 billion. Applied to Micron, that would translate into a stock price of about $40, according to data compiled by Bloomberg.

Chinese Hurdles

There are other reasons to say no to Tsinghua. A takeover of Micron by the Chinese company will face steep antitrust scrutiny and a national security review, particularly from U.S. regulators concerned about the loss of technology to foreigners. Micron is America’s only big manufacturer of dynamic random access memory, or DRAM, chips, according to Morgan Stanley.

Micron will have to tread carefully in negotiations. Tsinghua is state-backed and China is the world’s largest market for semiconductors. Micron got 41 percent of its revenue last year from the country.

The company can ill afford to run afoul of China’s government at a time when the country is taking steps to lessen its dependence on foreign technology and stepping up support of domestic chip production.

Upside Potential

With demand waning for the personal computers that use Micron chips and the company’s stock price down about 50 percent this year before the offer was reported, Micron’s management needs to carefully weigh any proposal that represents an upside.

That’s where other would-be buyers could give Micron more options. Toshiba Corp. or SanDisk Corp. may step forward as suitors, though SanDisk would need to take on a substantial amount of debt to pull a deal off, said Sundararajan of Summit Research.

Intel Corp., which owns a 20 percent stake in Tsinghua and gets a big chunk of its revenue from China, could be inclined to give its blessing to the Micron takeover. Then again, Intel also has had a relationship with Micron and may find greater value in acquiring the company outright, Timothy Arcuri, an analyst at Cowen Group Inc., wrote in a report on Tuesday.

“It is in play,” Sundararajan said. “Whoever has the money will make a bid.”

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