Rejected Samsung bid for SanDisk highlights woes in flash memory market, even with demand high

A $5.85 billion bid by Samsung Electronics Co. to take over SanDisk Corp., a wounded competitor that also serves as a partner, reflects the turbulence in the market for flash memory, a key ingredient in digital cameras, music players and other devices.

For now Samsung has been rebuffed in its attempt to scoop up SanDisk for $26 per share. SanDisk called the offer an "opportunistic attempt" to take advantage of its slumping stock price. But SanDisk left open the possibility for further negotiations if the pot were sweetened, and SanDisk shares jumped $6.19, 41 percent, to $21.23 on Wednesday.

The memory market is prone to severe boom-and-bust cycles, like the rest of the semiconductor industry, and is suffering now from a prolonged funk caused by a glut of chips and plunging prices, even though demand is high.

Those pressures have whacked companies like Milpitas, Calif.-based SanDisk, which owns more than a third of the U.S. market for flash memory cards.

SanDisk's profit has plunged 43 percent over the past two years, to $218 million in 2007, while its stock has tumbled from more than $60 per share in 2006 to less than $15 per share before word of the acquisition talks leaked this month. That decline vaporized $9 billion in shareholder wealth — and cracked an opening for South Korea-based Samsung.

Among other things, Samsung is the world's second-biggest semiconductor company, behind Intel Corp., and the biggest maker of a type of memory chip called NAND flash. In SanDisk, Samsung sees the chance to pick up valuable patents on current and future memory technologies and absorb a well-known company with steadily improving sales.

SanDisk had $3.9 billion in revenue last year, a nearly 20 percent improvement over 2006. Although its profits and market value have suffered, the company still enjoys rising demand for digital devices that need more and more storage capacity.

Samsung also sees an opportunity to tap into SanDisk's steady stream of revenue from patent licenses, which account for more than 10 percent of SanDisk's overall sales. Some of that comes from fees Samsung itself pays for the right to use SanDisk technologies in its memory chips.

One complication to a deal might be SanDisk's manufacturing relationship with Tokyo-based Toshiba Corp. If a deal were reached, Samsung could shift manufacturing chores away from the Toshiba-SanDisk joint venture and into Samsung's own factories — but selling its share in the venture to achieve that might be difficult given the memory glut, said analyst Jim Handy with the Objective Analysis research firm. Otherwise Samsung could renew the joint venture agreement with Toshiba, which Handy called the "best-case scenario."

Any deal could also raise antitrust questions because the combined companies would account for nearly half of all NAND flash shipments, Handy said, adding that he's "very doubtful that the government would allow such an acquisition to proceed, even in today's dire market."

Some financial analysts said SanDisk is making a mistake in hoping for an offer pegged closer to its shares' 52-week high of $55.98, reached last October.

Analyst Betsy Van Hees with Caris & Co. said the firm was "very disappointed and surprised" by SanDisk's rejection of the offer. She said SanDisk's management is "looking in the rearview mirror through rose-colored glasses."

The dynamics of the memory-chip industry have prompted speculation about other companies as acquisition targets as well. One possible combination is for Boise-based Micron Technology Inc., the world's fourth-largest NAND flash producer, to buy struggling rival Qimonda AG. German chip maker Infineon Technologies AG owns a majority of the shares of Qimonda, a business it spun off in 2006.

Source: AP News