Micron Seeks Profit Even in Worst of Times With Elpida Deal

Micron Technology Inc. completed its $2 billion acquisition of Elpida Memory Inc. today, seeking to deliver sustainable profits in the volatile market for memory chips used in personal computers and mobile devices.

Micron -- which has reported a net loss in five out of its last 10 fiscal years -- now has enough scale in the maturing industry to weather price swings that have eroded profits in the past, Chief Executive Officer Mark Durcan said.

“I believe that Micron, to a greater extent than ever before, controls its own destiny,” Durcan said. “We have enough scale, we have enough resources.”

Micron competes with South Korea’s Samsung Electronics Co. and SK Hynix Inc. in the memory chip market, where the number of suppliers has shrunk over time. Texas Instruments Inc. and Intel Corp. have exited, while others, such as Elpida and Qimonda, failed. The remaining manufacturers are now more focused on profit and less on boosting production in an attempt to grab market share from their competitors, said Betsy Van Hees, an analyst at Wedbush Securities in San Francisco.

“It’s not about being king of the world, it’s about being profitable,” said Van Hees, who recommends buying Micron shares. “You have everyone very cautious about capacity expansion plans.”

Elpida, the last Japanese maker of computer-memory chips, sought bankruptcy protection last year after losses left it unable to pay debts. Elpida won Tokyo District Court approval of Micron’s 200 billion yen ($2 billion) offer for the company in February, clearing the last major hurdle in the takeover.

Share Gains

The transaction closed today, the companies said in a statement. Elpida’s assets include a fabrication plant in Hiroshima and an ownership stake of about 65 percent in Rexchip Electronics Corp., according to the statement.

Buying Elpida will about double Micron’s share of the global market for DRAM, or dynamic random access memory, the most widely used memory chips in PCs. Combined, the companies will have 28 percent of the market, compared with 37 percent for Samsung and SK Hynix’s 26 percent, according to numbers from IDC Corp.

“I’m a true believer that the memory industry going forward is going to be a much, much better industry,” Durcan said. He sees a future for Micron when “in the worst of times we’re still making a little bit of money. In the best of times we’re doing very well indeed.”

The increasing cost of new factories, now above $5 billion, also has memory chipmakers less likely to bet they will get a return on equipping new facilities that become obsolete within five years, said Van Hees.

Share Rally

Industry-standard memory chips are traded as commodity items on spot markets in Asia. Long-term contracts between suppliers are influenced by the fluctuations in market prices. Producers have historically failed to time the introduction of new capacity with shifts in demand, often causing prices to tumble below the cost of making them.

Apart from gaining market share, Elpida’s capabilities in DRAM chips tailored for mobile phones are also important for Micron, Durcan said. Elpida, a supplier to Apple Inc., gives Micron new products, and the total size of the combination gives it enough scale to service larger customers, he said.

Micron’s stock, which had almost doubled this year through yesterday amid higher chip prices, traded at its highest price in six years earlier this month. The shares rose 3.6 percent to $13.05 at 9:40 a.m. in New York.

Durcan, who joined Micron in 1984, took over as CEO last year after his predecessor died in a crash in an experimental plane. The company has amassed losses of $3.36 billion in its last ten fiscal years.

“This business is clearly not for the faint of heart,” Durcan said.

Before it's here, it's on the Bloomberg Terminal.