PHILADELPHIA First things first: SanDisk Corp. will most likely be acquired by a rival. The only outstanding question is which of its NAND memory competitors or partners will buy the Milpitas, Calif., company.
Now that Samsung Electronics has let the acquisition genie out of the bottle, SanDisk's days as an independent entity are almost certainly over despite the poison-pill provision the board of directors has adopted to stave off any unwelcomed propositions.
That SanDisk would become a pawn in a high stakes game for dominance in the NAND flash market segment was almost inevitable. It's once rapid growth has stalled due to the deadly combination of slowing demand, overproduction and falling prices. Moreover, SanDisk's relatively strong position in several markets and rich royalty revenue base make it an inviting target for the likes of Samsung and Toshiba.
Additionally, Samsung and Toshiba are bitter rivals seeking leverage over each other in several markets. The addition of SanDisk would give the winner in the SanDisk sweepstakes a significant edge in the memory over the loser.
What does Samsung stand to gain by purchasing SanDisk? A successful takeover by the Korean giant would enable Samsung mop up some of the excess capacity in the NAND flash memory market, a move that should boost prices and help improve the company's operating position in that market segment.
SanDisk's licensing and royalty revenue is a major attraction for Samsung. The U.S.-based company generated almost 16 percent of its sales in the June quarter from intellectual property, a sharp increase from 13 percent of sales in the second quarter of 2007. Samsung reportedly pays a substantial amount to SanDisk each quarter for the right to use SanDisk technology.
Furthermore, Samsung has tremendous leverage over SanDisk. It is the company's biggest customer and contributes up to 14 percent of SanDisk's quarterly revenue through direct product purchases and royalty payments. No other customer represented more than 10 percent of SanDisk's revenue in the June quarter, according to the company.
Samsung is by far the leading global NAND flash memory supplier with a 42 percent market share, according to iSuppli Corp., which estimates the Korean company was the only "profitable NAND supplier during the second quarter due to its divese produce line." A successful acquisition of SanDisk would give Samsung an opening into the U.S. flash storage card market where SanDisk leads with a 36 percent market share, iSuppli said.
SanDisk became a target because of events largely outside its control. The company's revenue exploded in recent years and more than doubled between 2005 and 2007, rising to $3.9 billion last year from $1.8 billion two years earlier.
The outlook for this year isn't that positive, however. Revenue for 2008 is expected to slow 14 percent to $3.36 billion, from $3.9 billion in 2007, as prices of memory chips continue to fall.
SanDisk's 2009 revenue will likley improve but not by much, according to analysts polled by Thomson Reuters. The analysts estimate SanDisk's 2009 annual revenue will only improve fractionally next year to $3,37 billion.
Blame the revenue fall off on worsening price conditions in the NAND market, a result of the additional manufacturing capacity added in recent years. The increase in volume drove down prices sharply as vendors sought to retain market share. In 2007, for instance, the price of NAND memory ICs decreased 60 percent.