Prices have continued to decline this year, and remain a frustrating problem for NAND manufacturers, especially vendors forced to divert huge amounts of money into operational expenses at a time of spiraling plant expenses. With new fabs planned, and capacity utilization rates dropping, the industry sector is clearly overdue for consolidation.
Will Toshiba fight for SanDisk?
It's unlikely Toshiba will stand by idly while Samsung walks off with SanDisk, although the Japanese company may not be able to compete in a bidding war with its Korean rival.
Still, there's a great deal at stake for Toshiba, which could face serious hurdles in its NAND flash memory production operation if Samsung scuttles pre-existing agreements after gaining control of SanDisk.
Toshiba and SanDisk are partners in two joint ventures called Flash Partners and Flash Alliance. Both manufacture NAND flash memory on 300-millimeter wafers.
SanDisk has a 49.9 percent interest in each of the two JVs, a stake that means it must agree to use certain portions of their production, and also "fund direct and common research and development expenses" related to the operation of the units.
A third JV between Toshiba and SanDisk produced NAND flash memory on 200-millimeter wafers, but the partners have decided to close the business because it was "no longer cost effective relative to current and projected market prices for NAND flash memory," according to a SanDisk filing with the U.S. Securities and Exchange Commission.
Unwinding all these complex relationships may not be easy for Samsung if it succeeds in gaining control of SanDisk due to contractual obligations related to JV funding, along with iron-clad product purchase commitments.
"SanDisk's large cash commitments to capacity expansion at its manufacturing joint venture with Toshiba, as well as lease guarantees and wafer purchase obligations, could still complicate matters," said Daniel Berenbaum, an analyst at SG Cowens Securities Inc.
"There is also the possibility of onerous change of control provisions in the JV agreement," he added. "If Toshiba feels that its own prosperity is threatened it could attempt to scuttle a deal or, conversely, make a counter-offer of its own."
The more likely outcome is that Samsung increases its already high offer and extend a sweetener to Toshiba while allaying antitrust concerns with additional concessions.
Should all these scenarios fail, SanDisk's board of directors must pray for pricing sanity to return to the flash memory market. Otherwise, the company's market valuation will again slide, and it might have to accept an even lower offer from a different suitor.