SEOUL, Sept 18 (Reuters) - Samsung Electronics (005930.KS) $5.9 billion offer for SanDisk Corp SNDK.O faces major hurdles, but a savage industry downturn should persuade the U.S. flash memory card maker’s biggest shareholders to pressure the board into accepting the deal.
South Korea’s Samsung, the world’s biggest maker of memory chips, has offered to buy SanDisk for $26 a share in cash — around an 80 percent premium. SanDisk, which makes NAND flash memory cards and drives for devices such as mobile phones and cameras, has rejected the bid as undervaluing the company. [ID:nN16292606]
But analysts say the California-based company can ill afford to snub a deal at a time of oversupply in the NAND flash industry and when worsening consumer confidence threatens sales of gadgets that use the chips.
“This is a buyer’s market,” said Peter Yu, an analyst at BNP Paribas. “Samsung has good timing, cash, balance sheet and a lot of leverage on its side.”
Samsung, which has until now shied away from big acquisitions in favour of growing its own sales, needs to persuade some of SanDisk’s top institutional investors of the powerful logic behind the deal. In turn they can pressure SanDisk’s board to accept it.
SanDisk’s ownership is dominated by institutional investors, led by Fidelity, which owns a 12 percent stake. SanDisk CEO Eli Harari only owns 1.4 percent of the company.
“Just securing 20 or 30 percent of SanDisk could give Samsung management control,” said Hyundai Securities analyst Jay Kim.
Kim added that SanDisk shareholders may be reluctant to wait for a recovery in its share price, which slumped to a record low in June, from a peak near $80 a share in early 2006.
Buying SanDisk would give Samsung advanced technology and a tighter grip on its market dominance as smaller rival Toshiba Corp (6502.T) is challenging its position and the industry battles steep price falls due to capacity overbuilding.
Samsung, which pays SanDisk over $350 million a year in royalties to use patented flash technology, is looking not only to slash those costs and but also gain control of SanDisk’s many licences that control the industry.
A Toshiba counterbid is the only serious obstacle to a combination, analysts say.
The second biggest NAND maker, which jointly operates a chip plant in with SanDisk, has said it may bid for the Silicon Valley company, but that it was not in talks yet.
“Toshiba doesn’t have enough cash to make a counteroffer,” said James Song, analyst at Daewoo Securities. “Toshiba may rather take over its joint fab with SanDisk, and let Samsung go for SanDisk itself. That way Toshiba can seek to increase production as it wants.”
But Tetsuya Wadaki, an analyst at Nomura Securities, reckons Toshiba will have to bid.
“Toshiba can’t risk [some key technology] going to Samsung without crippling its competitiveness,” he said.
Antitrust concerns are another obstacle facing a possible combination, with U.S. and European competition bodies likely to look at how the merged company would affect the market for NAND chips.
For its part, Samsung said its letter to SanDisk it was confident the deal would meet government approval.
Financing a deal in the middle of deepening credit crunch may also prove challenging.
Samsung had 6.4 trillion won ($5.6 billion) in cash as of end-June. But the sharp fall in the won KRW= currency against the dollar in the past few weeks has shrunk the dollar value of the reserves.
“Samsung will likely have to raise about half of its SanDisk purchase price in the market,” said Lee Min-hee, an analyst at Dongbu Securities.
Nevertheless, a combination could be transform the way the typically conservative company does business, under its new CEO, Lee Yoon-woo.
“While SanDisk could be a costly purchase for Samsung, acquisitions of this kind are indispensable,” said Lee. “There is simply no other way Samsung can find new growth engines.” ($1=1145.8 Won) (Additional reporting by Mayumi Negishi in TOKYO; Editing by Louise Heavens)