SanDisk, Samsung ink patent cross license, flash supply agreements amidst memory industry turmoil

In a move that the companies believe will help restore flash market growth, SanDisk and Samsung Electronics Co Ltd today announced they have signed a deal to renew their flash cross-license and flash memory supply agreements under which Samsung will continue to make available to SanDisk a guaranteed portion of its flash memory production output.

The new agreements become effective when the current cross license and supply agreements expire on August 14, and will run for seven years.

The new patent cross-license agreement includes rights to both SanDisk's and Samsung's patents covering multi-level cell flash memory and flash storage systems, but does not license either companies patent claims specific to 3-D memory technology.

The new agreements come as the flash market continues to face oversupply issues, damaging ASPs (average selling prices) and hindering profitability for suppliers The flash market has also been hampered by shrinking demand for consumer electronics that use such memory as consumer spending has declined on the cold global economy.

The agreements also come not too long after merger and acquisition possibilities circled the two memory makers. In September 2008, a proposed Samsung unsolicited acquisition of SanDisk became public. Despite company troubles including forced layoffs and Q3 results driven down by the harsh flash market, SanDisk rejected the $5.85 billion bid. Samsung formally withdrew the bid in October after SanDisk inked a capacity deal with rival Toshiba. Analysts had speculated that Samsung's interest in SanDisk stemmed from the company's wish to relive itself of the between $400 million and $500 million estimated annual flash royalty payments it makes to SanDisk.

According to Broadpoint AmTech Analyst Dinesh Moorjani, Samsung represents more than 50% of SanDisk's total royalties.

"As we have previously highlighted, we believed Samsung would renew the patent agreement prior to the expiration of the current agreement in order to access IP related to 3-bit and 4-bit per cell NAND," Moorjani said in a report this morning.

Milpitas, Calif-based SanDisk and Seoul, Korea-based Samsung estimated that over the life of the new license the effective rate of the fixed payments and royalties is expected to be approximately half of the effective rate in recent years under the current license. Further financial terms of the agreements were not disclosed.

Both companies said they were pleased with the agreements.

"We believe that they represent good value for our stockholders and enable both parties to focus on the growth markets at hand," Eli Harari, SanDisk chairman and CEO, said in a statement. "We are excited about our opportunities in mobile, computing, and consumer flash storage markets. Furthermore, continued access to Samsung’s flash capacity under competitive terms gives us greater flexibility in managing our future capital expenditures for captive capacity. We look forward to a constructive relationship with Samsung in the years ahead."

“The renewal agreements enable Samsung and SanDisk to each focus their energies on restoring flash market growth," Oh-Hyun Kwon, president of the Samsung's semiconductor business, said in the statement. "It is clear that these renewal agreements are aimed at strengthening the on-going business relationship between Samsung and SanDisk, and we are pleased that the two companies have worked hard to achieve a significantly improved balance on the patent license."