Samsung's SanDisk Bid May Boost Toshiba

Chipmaker SanDisk would bring crucial technologies to the South Korean electronics giant, but how would the move affect the No. 2 Toshiba?

by Moon Ihlwan and Kenji Hall

It is increasingly shaping up to be an open brawl reminiscent of Microsoft's (MSFT) attempt to take over Yahoo (YHOO). South Korea's Samsung Electronics has released to the public its letter sent on Sept. 16 to the board of directors at SanDisk (SNDK) expressing deep disappointment over a delay in its $5.85 billion cash offer for the U.S. flash memory-card maker.

Shortly after Samsung disclosed the proposal, SanDisk issued a statement saying its board "unanimously rejects" the offer (although it did not rule out a deal at a better price). Samsung officials say the company is frustrated with four months of unproductive negotiations, so Samsung is going straight to shareholders with a price of $26 a share—an 80% premium to its Sept. 16 close and a whopping 93% premium over SanDisk's closing stock price on Sept. 4, when a Korean daily reported that the two were in talks for a possible acquisition (BusinessWeek.com, 9/5/08).

Now the stage is set for a public debate on pricing and benefits for parties involved. "Like in the Microsoft-Yahoo case, shareholders could start putting pressures on the SanDisk board to hammer out an acceptable deal," says Michael Min, technology specialist at fund manager Tempis Capital Management. "A compromise could well be arranged as some shareholders find it a good time to exit the market in the face of the slumping flash-chip market."

Crucial Technologies

Industry watchers see Samsung's move as an important step in its strategy aimed at cementing its leadership in the NAND flash chips used in storing data for music players, digital cameras, and handsets. SanDisk has hundreds of patents in the U.S. and overseas, and technologies to pack data storage space in multilayers in a single chip. Samsung, the No. 1 flash-chip maker with more than 40% market share, pays SanDisk some $400 million annually to license those patents.

The technologies are crucial as Samsung prepares to ramp up its production of so-called solid-state drives (SSD) that could replace hard drives in computers for storing data. "SSD will be the most important application for flash chips in the future and a Samsung-SanDisk combination could expedite the arrival of its mass market by bringing down costs dramatically through technological innovation," says Jay Kim, semiconductor analyst at brokerage Hyundai Securities in Seoul.

An SSD has several advantages over a hard drive. While a conventional hard drive stores data on a magnetic disk that spins at up to 7,200 rpm, the SSD is a chip-set without a moving part. That makes it faster, less vulnerable to shocks, and less demanding of energy. It also enables notebook PC makers to bring out lighter and smaller laptops.

Price Gap Narrows

The main barrier for the mass adoption of SSDs has been their high cost. Although the price gap between hard drives and SSDs has narrowed dramatically in recent years, an SSD is still more than five times as expensive as an alternative hard drive now. Industry officials hope the gap will shrink to three times by the end of next year and two times by 2010. Market researcher iSuppli figures PCs will account for about a third of NAND chip applications in 2011, from less than 3% this year, while the chip's market size will rise to $28 billion in 2011 from $15 billion.