1. The royalty/licensing trap.
The portion of SanDisk revenue generated from royalty and licensing fees has been increasing steadily even as weak pricing conditions hurt product sales. While this is good news for the company, it hurts customers like Samsung Electronics, which see their payments helping to prop up a rival in a price-sensitive market. Eliminating the royalty payment or reducing it substantially is now a key goal for Samsung, which sees this as a key competitive advantage in several of its market segments.
2. Strike while the enemy is down.
SanDisk's stock price has fallen sharply over the last year, providing an opening for a customer already irritated over a protracted negotiation over licensing fees. Although Samsung's $26-per-share offer for SanDisk looks attractive—representing a hefty 73 percent premium to SanDisk's closing price the day prior to the offer—it is still less than half the stock's 52-week high of $55.98. In fact, Samsung had previously indicated it would be willing to pay a higher premium when the companies first began discussing the acquisition in May, according to SanDisk.
3. Overcapacity hurts everyone and someone will do something about it.
All the companies in the NAND flash memory business are hurting, badly. SanDisk just happens to be in a more difficult position than rivals Samsung and Toshiba Corp. because it is more dependent upon that market segment for a majority of its revenue. As a result of overcapacity, the flash memory market is swamped with excess products, turning the segment into a buyer's market for OEMs. This is hurting everyone, and since anti-competition rules make it illegal for the rivals to engage in price fixing, the best solution currently available to flash memory suppliers is to close down some plants. Buying SanDisk would give Samsung the opportunity to tamp down on supply by cutting off production.
4. Buy one, get something else free.
Samsung executives would never admit this, but buying SanDisk would give the Korean company a great opportunity to tweak another rival's nose. Samsung and Toshiba are locked in a fierce struggle for market share in several segments of the semiconductor market. So far, neither company has been able to upend the other. A successful takeover of SanDisk by Samsung would cause a great deal of consternation at Toshiba, which has two significant NAND flash wafer joint ventures with SanDisk and has contributed millions of dollars to fund the partnership.
5. Samsung is no longer the same.
Lee Yoon Woo, Samsung's new CEO, is making a statement with the SanDisk offer. He wants the market to know the company is adopting a different operational strategy compared with the more staid style of his predecessor. The old Samsung made few, if any, acquisitions and relied on internal R&D to fuel growth. The new Samsung is forcefully telling the market it wants to be a major player in any consolidation of the semiconductor market. No longer will Samsung hang back while others make acquisitions that could end up limiting its growth. The new Samsung wants to become a truly global player and name brand. Strategic acquisitions will give it that opportunity and there's no better starting point than with a customer it already knows inside out.