Milpitas (CA) – Bad times offer great opportunities for some and that may be especially the case for Samsung, who launched a hostile bid to take over flash memory card maker Sandisk. The bid represents at 73% premium over Sandisk’s current market value, but is less than half of what the company was valued at one year ago.

Flash companies have been on a rough ride of cut-throat competition and eroding NAND prices have cut deep into the profit margins. In the first quarter of this year alone, the per-megabyte price for the memory declined by an astounding 36% with full year estimates of 50-60%. Samsung dictates the market with a market share north of 42%, while Toshiba holds another 28% and even industry giants such as Hynix and Intel-Micron have a hard time to keep the pace.

Companies such as Sandisk, whose business depends on stable flash prices, were hit especially hard over the past year. Quarterly profits declined and dropped deep into the red in the most recent quarter ended June 29, 2008. The company lost $68 million on sales of $816 million. The stock closed at $15.04 today. Down from $30.48 in January of this year and down from $57.80, an all-time-high that was recorded on July 25, 2007. The fact that the stock is down quite a bit and the fact that Sandisk is the dominant flash memory card company makes it an attractive acquisition target.

Confirming previous rumors, Samsung said that it is offering $26 per share (a 73% premium over today’s closing price), valuing Sandisk at about $5.84 billion. Samsung considers its offer as fair and describes it as offering a 93% premium over the stock’s closing price on September 4, the day before first reports of a possible acquisition offer, as well as a 164% premium over the average stock price of the 30 days prior to September 4.   

Samsung has gone into negotiation mode, rejecting the unsolicited offer. According to Sandisk, the offer undervalues the company, does not reflect the synergies Samsung would gain and is an “opportunistic attempt” to take advantage of Sandisk’s current stock price. The company complained that Samsung showed first interest to acquire the company on May 22, 2008, when the stock price was at $28.75 and accuses Samsung that the offer is a “calculated negotiating ploy or an attempt to gain leverage in the ongoing licensing negotiations between the companies.”

In Sandisk’s defense, Samsung is more than likely taking advantage of not only the stock price, but also the cheap exchange rate of the dollar. Back in January, Sandisk’s market capitalization was $6.84 billion and in July 2007 it was almost $13 billion. Conceivably, buying Sandisk for $5.8 billion would be a bargain.

Samsung argues that the “world has changed dramatically in the past 52 weeks as can be seen from SanDisk’s own disappointing results.” The firm claims that “it will take the NAND flash market quite a bit of time to recover” and Sandisk will need to fund critical investment and development over the next several months,” which hints to some of Sandisk’s commitments, such as a joint venture fab with Toshiba that is planned to go online by 2010.

“Our offer insulates your shareholders from the risk of market conditions that have severely deteriorated and are expected to remain challenging,” Samsung said.

Cool

Sep 17, 2008 18:11     

That is a really good buy, but why samsung?
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