The Die Is Cast for SanDisk

10/30/2008 10:00 am EST


Michael Murphy

Former Editor, New World Investor

Michael Murphy, editor of New World Investor, says Samsung’s effort to acquire the  maker of flash memory chips isn’t done yet.

SanDisk (Nasdaq: SNDK) fell after Samsung withdrew their offer to buy the company for $26 a share. Like SanDisk's rejection of the offer, I think all of this is just a negotiating tactic. Samsung needs SanDisk's technology and patents if they want to stay in the NAND flash memory business, where they are the number-one producer today.

The smaller the die that electronic circuits can be crammed into, the lower cost per die that a manufacturer can achieve. Today, Samsung has a die size advantage over SanDisk. But the advantage will flip to SanDisk during the first quarter of 2009 as SNDK brings up its three-bit-per-cell multi-level-cell technology in a 32-gigabit part.

Then, in the second quarter of 2009, SanDisk has said it will start producing its four-bit-per-cell technology, which reduces die size requirements by nearly a third, and [will] ship the industry's first 64 gigabit part. This will provide SanDisk with a substantial die size advantage over Samsung.

Samsung recently withdrew its appeal to a federal court, giving up on their attempt to overturn the binding arbitration decision that Samsung will no longer have license rights to either SanDisk or mSystem patents and intellectual property after August 2009. (SNDK bought mSystems in 2006.)

This means that Samsung would lose their rights to develop and produce parts using four-bit-per-cell technology. Samsung also will lose rights to other SanDisk system-level patents if a new agreement is not reached before August 2009. So, Samsung has a strong, continuing motivation to either come to an agreement with SanDisk that would involve substantial royalties or just buy the company.

During a conference call, management said: "SanDisk holds many of the fundamental patents and know-how for [cutting-edge flash memory] technologies and Samsung knows it. This is why owning these patents and the know-how is so critical for Samsung's future profitability."

Strong sales of Intel's Acorn processor show that the mobile internet device, a smaller-than-laptop computer where power consumption, weight, and size are key, will build traction for NAND flash solid state drives to replace hard disk drives. As the solid state drive trend builds, NAND flash manufacturing capacity will be absorbed quickly, and prices and profitability for NAND flash manufacturers should improve markedly.

I think SanDisk will either enjoy a material cost advantage over Samsung or dramatically increase its highly profitable license revenue—or be bought out. I am moving SNDK to a Top Buy after [the recent] price drop, keeping the $15 buy limit and $32 target price either in a buyout or based on earnings growth.  (It closed below $8 Wednesday—Editor.)

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