SanDisk Shares Soar on Samsung Interest

The flash-memory card leader has struggled, but SanDisk has much to offer Samsungfrom patents to keychain drives to MP3 players

Battered by a year of flagging prices for flash-memory chips and by an inability to get traction in sales of digital media devices, SanDisk (SNDK) may soon get scooped up by South Korean electronics giant Samsung Group.

SanDisk shares gained $4.18, or more than 31%, on Sept. 5 after Samsung said it's considering options for SanDisk that include an acquisition. SanDisk issued a statement that neither confirmed nor denied that a deal is in the offing.

Before the gains, SanDisk's stock had dropped some 60% since the year began. As the market leader in flash-memory cards for digital cameras and other consumer electronics devices, SanDisk has been hurt by pricing pressure caused by an oversupply of the chips on which the cards are based.

Royalties Aplenty

But SanDisk has two strengths that make it attractive to Samsung. It has a strong patent portfolio relating to NAND flash and memory controllers, and it has annually collected $400 million to $500 million in royalties—much of it from Samsung, the world's largest manufacturer of NAND chips. That contributed to the $254 million in licensing and royalty revenue SanDisk collected in the first six months of 2008, accounting for more than 15% of overall sales for the period.

That deal with Samsung is due to expire in August 2009. "With SanDisk's market cap at between $3 billion and $4 billion, Samsung would save money on royalty payments within a few years," says Nam Kim, memory market analyst at iSuppli. Samsung would also earn royalty payments from other chipmakers whose products are covered by the SanDisk patents.

SanDisk has a huge retail footprint, too, and sells its products at Best Buy (BBY), Circuit City (CC), Costco (COST), and Amazon (AMZN), among others. Samsung has only a limited retail footprint for its flash products. "Samsung has almost no retail presence in flash," Kim says. "They do some things locally in South Korea, but they don't do anything in the U.S." Memory chipmaker Micron Technology (MU) purchased Lexar Media in 2006, in part to gain a larger retail footprint. When prices were plunging on the so-called DRAM PC memory chips that make up Micron's main business, Lexar's retail memory card business looked attractive.

Sansa MP3 Players

SanDisk itself acquired M-Systems, an Israel-based company that was one of the first to successfully market USB keychain drives—another business Samsung would love to penetrate (, 8/1/06).

SanDisk also sells the Sansa, the second most popular line of MP3 players in the U.S. behind Apple's (AAPL) iPod line. Samsung makes MP3 players as well but hasn't had much success in the U.S. market (, 5/8/06).

SanDisk, however, has lagged behind the rest of the industry in producing flash-based PC hard drives, says Betsy Van Hees, analyst with Caris & Co. in New York. "Micron has one, Intel has one, even Samsung has one. Everyone in the flash industry has one but SanDisk," she says. "That makes it seem like a good time to exit." It might also be a good time for Samsung to pounce.

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