TOKYO (Reuters) - Micron Technology won the right to negotiate exclusively to buy Elpida Memory Inc after offering more than 200 billion yen ($2.5 billion) for the failed Japanese chipmaker, according to a source with direct knowledge of the deal that would more than double the U.S. company's global market share.
By acquiring Elpida, Micron would boost its market share to 25 percent, surpassing South Korea's SK Hynix and becoming the second-biggest maker of DRAM memory chips used in personal computers, according to U.S. technology research firm IHS iSuppli. Samsung Electronics is the largest.
Elpida, which also makes chips used in smartphones and tablets, has been searching for an investor to sponsor its restructuring after filing for bankruptcy protection in February with 448 billion yen in liabilities.
Part of the 200 billion yen would be used to repay Elpida's debts and part of it will be invested in the chipmaker's operations, the source said, declining to be identified because the negotiations are confidential.
With investors concerned about how much Micron might pay, its shares have fallen about 20 percent since late March when it was first identified as a bidder for Elpida.
Waddell & Reed analyst Brad Warden said Micron's offer was half a billion dollars more than he had expected but that the potential tie-up would improve the memory industry. Waddell & Reed owns $155 million worth of Micron's stock.
"The most important thing is, after this deal you end up with three major players in DRAM, which makes it a more rational market, with more rational capital decision-making and probably more stability from a pricing standpoint," Warden said.
Micron held $2.1 billion of cash and short-term investments, while long-term debt totaled $2.2 billion, according to the company's earnings statement for the quarter ended March 1. It issued an additional $870 million of convertible senior notes in April.
In the final round of bidding that closed last Friday, Micron also offered to keep open Elpida's two main factories in Japan and guarantee jobs for the company's current employees for the time being, the source said.
Those promises helped it to outmaneuver SK Hynix, which dropped out of the race last week. U.S. private equity firm TPG Capital LP and China's Hony Capital had placed a joint bid in the final round, the source said.
Orbis Investment Management, Micron's third largest shareholder, said it was too early to judge a potential deal, which could involve substantial investments by the Boise, Idaho company to upgrade Elpida's factories in Japan.
Adam Karr, head of Orbis' U.S. research team, said Micron's management has a track record of not overpaying for assets in the cut-throat memory chip business.
"They have a lot of scars, and they've been through a lot in this industry, so we'd be confident they'd handle this in a prudent way," Karr said.
The auction was overseen by Elpida Chief Executive Yukio Sakamoto and lawyer Nobuaki Kobayashi, the court-appointed trustees.
A Micron spokesman and the office of Elpida's trustees declined to comment.
Shares of Micron fell 1.5 percent to $6.45 late Monday afternoon.
POTENTIAL RIVAL BID
A final restructuring plan for Elpida will require the approval of a local court and the company's creditors, not all of them may be happy with the acquisition deal.
Last week, a group of Elpida debt holders said they may submit a rival reorganization plan if trustees agreed to a low-ball bid, referring to a previous media report that put Micron's first-round offer at 150 billion yen.
The 200 billion yen offer is better than the previously reported price, a source close to the group of Elpida debt holders told Reuters on Monday.
"But you cannot tell from the latest reports if what Micron is offering is acceptable or not. The latest numbers could seriously undervalue Elpida," the source said, declining to be identified because he is not allowed to speak to the media.
The bondholders have told Elpida's trustees to share information with key creditors before finalizing any deal with Micron, the source said. They also want to know how much of the money to be injected into Elpida would be used to repay creditors, according to the source.
Elpida previously said it may submit its restructuring plans to a local court by August 21.
A growing preference for tablets has dampened demand for memory chips used in PCs, and growing costs to implement new technology has added to pressure faced by dynamic random-access memory (DRAM) makers.
If Micron buys Elpida, it may convert production lines now making DRAM to produce more profitable chips widely used in smartphones and tablets, many analysts believe.
Elpida's failure was the largest ever by a Japanese manufacturer and an embarrassment for the government, which had propped up Elpida with public funds to save what was billed as the country's last hope for the DRAM chip market.
Elpida was formed in 1999 through a merger of the DRAM units of Hitachi Ltd and NEC Corp under a government initiative to promote the country's DRAM business. In 2003, Mitsubishi Electric sold its DRAM division to Elpida.
Elpida reported losses for five straight quarters, hit by sliding prices of DRAM chips and a strong yen.
Analysts say they are positive about the outlook for chips used in mobile devices, which contributed 50 percent of Elpida's revenue in the latest fiscal year to March while only accounting for 15 percent of the memory capacity it produced.
($1 = 79.8800 Japanese yen)