Samsung's SanDisk Bid May Boost Toshiba

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SanDisk founder and chief executive Eli Harari says Samsung's offer does not reflect the value of the "substantial synergies" that the Korean company can attain from an acquisition. "We believe Samsung's proposal does not provide appropriate value to our stockholders and is opportunistically timed at the trough of an industry-wide downturn," Harari said in a letter to Samsung CEO Lee Yoon Woo. Lee says the Milpitas (Calif.)-based company "continues to cling to unrealistic expectations on both its standalone market value and an appropriate merger price."

Samsung spokesman James Chung says his company has not yet made any decision on whether to raise its bid. But analysts say Samsung could decide to buy a majority stake instead of making an outright buyout, and increase the per-share price. "I think the pricing difference could be bridged," says Park Kyung Min, chief executive at fund manager Hangaram Investment Management.

What Will Toshiba Do?

So, what would a Samsung-SanDisk alliance do to the NAND industry's No. 2 player, Toshiba? The Japanese tech company had nearly 28% market share in the second quarter of this year. Its success has partly come thanks to a collaboration with SanDisk that dates back to 1999. (They formed the first of their production joint ventures in 2000.) Toshiba (6502.T) benefits from SanDisk's research expertise in the field and access to its patents, which other companies pay steep royalties to license.

But few analysts think Toshiba will risk a bidding war with Samsung. One reason: Just two years ago, Toshiba spent $5.4 billion acquiring Westinghouse Electric to expand its business in building nuclear reactors. Another multibillion purchase so soon after the Westinghouse deal hardly seems likely. A Toshiba spokesman declined to comment.

And letting Samsung grab SanDisk might be a plus for Toshiba. Samsung isn't necessarily Toshiba's biggest threat. Up-and-comers Hynix Semiconductor, Micron Technology (MU), and Numonyx are more likely to erode Toshiba's market share than Samsung, says Macquarie Securities analyst Damian Thong.

Three-Way Deal Possible

Recently, SanDisk said it would be scaling back its capital expenditures over the next two years. That's likely to stick Toshiba with a bigger chunk of the bill to run their jointly owned chipmaking fabs, in Yokkaichi, western Japan. If Samsung bought SanDisk, the Korean giant would have two choices: Invest more in SanDisk's ventures with Toshiba or pay Toshiba to break off the arrangement. Either way, it could mean less spending for Toshiba, which could use the money to fund the two new NAND plants in Japan it hopes to build next year and have online by 2010.

There's even a possibility that Samsung might consider a three-way cross-licensing deal that would do away with royalty payments altogether, says Thong. The three might share the supply of chips but compete on a product level, something Samsung already does with Sony (SNE) in the liquid-crystal-display panels for flat-panel TVs. A similar arrangement in NAND chips, though, would face scrutiny from antitrust authorities.

Moon is BusinessWeek's Seoul bureau chief. Hall is BusinessWeek's technology correspondent in Tokyo.