Possible Samsung acquisition of SanDisk viewed as positive

By Suzanne Deffree, Managing Editor, News -- 9/5/2008

Samsung Electronics Co may soon acquire SanDisk Corp, according to reports from several news organizations and analysts, who believe such a deal would be favorable to the overall memory industry.

“Our channel checks confirm that there is a high possibility that Samsung is looking to acquire SanDisk,” Leman Brothers Analyst CW Chung wrote in a research note this morning.

As all memory makers have, Milpitas, Calif-based flash maker SanDisk has felt the twinge of oversupply and pricing issues. Indeed, recent estimates from iSuppli Corp suggest flat annual flash revenue growth in 2008 and SanDisk's July Q2 statement refected that, as CEO Eli Harari stated that “flash inventories remain excessive and pricing and margins will therefore remain under pressure until supply and demand come into balance.” Harari made the statement as the company reported its first quarterly loss, a slide in revenues, and said it would delay production ramps and investments at two of its fabs. Chung believes that a Samsung acquisition would help ease the pricing pressures in the memory supply chain, as well as benefit South Korea-based company.

“If Samsung succeeds in acquiring SanDisk at a reasonable price, we believe this will be positive for both the overall memory market as well as for Samsung Electronics. We may take this type of M&A [merger and acquisition] activity as a signal of the nearing of the memory bottom, as industry consolidation is typical of previous bottoms for the memory market,” he said in the research note.

Chung further reported that Samsung has paid annual royalties regarding flash memory patents between $400 million and $500 million to SanDisk. “As SanDisk's market cap is just around $3 billion, we believe this reason itself could serve as an acquisition merit for Samsung,” he said.

For more on the flash market, see "iSuppli to NAND market: Don’t count on second-half revenue growth." To comment on this news, see "Samsung, SanDisk acquisition rumors signal more consolidation, possibly stock rebounds ahead."

Still, there are obstacles to such an acquisition. Beyond potential anti-trust issues, SanDisk’s close relationship with Toshiba should be noted. The duo has jointly conducted a series of memory ventures for years and in February announced plans for a new production joint venture and the construction of a new 300-mm wafer fab in Japan to meet their anticipated future demand for NAND flash memory.

“As these issues are not yet resolved, we believe it is too soon to conclude that Samsung can successfully acquire SanDisk. Furthermore, as the M&A news has surfaced during the early stages of Samsung exploring the acquisition possibility, we believe this may also weigh on the success of the deal,” Chung concluded.

While Samsung has yet to issue an official statement on the possible acquisition and did not return calls to Electronic News requesting comment, SanDisk in a short press release said: "SanDisk periodically has conversations with multiple parties, including Samsung, regarding a variety of potential business opportunities. We evaluate all of these opportunities, but maintain a policy of not commenting on market rumors or speculation."

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