Bloomberg News

Bankrupt Elpida Inspires Billion-Dollar Bids Over Samsung: Tech

April 11, 2012

Elpida Memory Inc. memory chips are displayed in this arranged photograph in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

Elpida Memory Inc. memory chips are displayed in this arranged photograph in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

For a bankrupt company, Elpida Memory Inc. (6665) is getting a lot of attention as the subject of a billion-dollar chess game among the biggest technology companies.

They don’t necessarily covet Elpida’s debt, workforce or even most of its business. They just want the part of its business that makes chips for Apple Inc.’s mobile devices --and, even more, they want to make sure their competitors don’t get that.

SK Hynix Inc. (000660), the world’s second-largest memory-chip maker, said March 30 it’s bidding for Tokyo-based Elpida. Private-equity firm TPG Capital also plans a bid, a person familiar with the matter said on April 6. Toshiba Corp. (6502) may join Hynix, and Micron Technology Inc. (MU:US) may also try to buy the company’s assets, Japanese media including the Nikkei newspaper have reported.

Whoever gets the prize will be in a better position to compete with Samsung Electronics Co. (005930), the world’s largest memory-chip maker, and make life even tougher for all smaller rivals.

“Elpida’s technology is what everyone wants, as its technology can compete with Samsung’s,” Mitsuo Shimizu, a Tokyo-based analyst at Cosmo Securities Co., said by phone.

Japan’s DRAM Leader

Elpida was Japan’s largest maker of dynamic random access memory, or DRAM, chips. Then the price for DRAM chips used in personal computers plummeted as they became a commodity and as PCs gave way to mobile communication devices. Amid a stronger yen hurting exports, Elpida filed for bankruptcy protection on Feb. 27 after losing money for five quarters.

Samsung successfully made the transition to mobile DRAM and controlled 54 percent of the global market for such chips, according to TrendForce Corp., a Taipei-based research company. Hynix followed with 21 percent and Elpida with 17 percent for mobile DRAM as of the fourth quarter of last year.

Shipments of DRAM chips used in mobile devices such as Apple (AAPL:US)’s iPhone are set to surge sevenfold by 2015 from 2011, according to IHS Inc.’s iSuppli, an Englewood, Colorado-based research company.

The mobile DRAM business is “the only thing worth buying” among Elpida’s assets, Amir Anvarzadeh, a Singapore-based manager for Asian equity sales at BGC Partners, said in a phone interview.

Kodak’s Bankruptcy

Elpida isn’t the only company in bankruptcy attracting interest. Eastman Kodak Co., which filed for Chapter 11 protection in January, is seeking to sell more than 1,100 digital-imaging patents it has said are worth more than $1 billion. The photography pioneer is also pursuing patent- infringement suits against device makers Apple, Research In Motion Ltd. and HTC Corp., maintaining the companies owe it royalty payments.

Elpida makes all of its mobile DRAM chips at its plant in Hiroshima, Japan, 40 percent of them for Apple, Anvarzadeh said. Apple overtook Hewlett-Packard Co. as the world’s largest chip buyer last year, according to Stamford, Connecticut-based Gartner Inc.

“Their mobile DRAM technology is perceived as good globally,” said Park Hyun, a Seoul-based analyst at Tong Yang Securities Inc. Elpida began supplying Apple with the chips ahead of Hynix, Park said.

Unlike DRAM chips for PCs, mobile DRAM chips are customized to the specifications required by device makers.

Mobile Memory

Taking over Elpida would enable Boise, Idaho-based Micron to boost its mobile DRAM business. Micron had 7.3 percent in mobile DRAM as of the fourth quarter, according to TrendForce. For Tokyo-based Toshiba, which only produces NAND flash, a different type of memory chip, buying Elpida’s DRAM assets would allow it to package both memory chips on its own, according to TrendForce.

Suwon, South Korea-based Samsung and Icheon, South Korea- based Hynix each produce both NAND chips, used to store data permanently, and DRAM chips, which store data temporarily.

Hynix declined to comment beyond the March 30 regulatory filing in which it expressed interest in Elpida, said Park Seong Ae, a Seoul-based spokeswoman for the company. Keisuke Ohmori, a spokesman for Toshiba, declined to comment, as did Tim Payne, an external spokesman for TPG in Hong Kong. An Elpida spokesman, who declined to be identified, citing company policy, also declined to comment.

Micron President Mark Adams also declined to comment on a possible investment in Elpida in a March 22 interview.

“Micron executives have stated that we’re interested in opportunities for industry consolidation, but we have nothing to add at this time,” said Dan Francisco, a spokesman for Micron.

Samsung Versus Apple

Samsung, the largest seller of chips for Apple, and the Cupertino, California-based iPhone maker have been suing (AAPL:US) each other globally since last year over patents related to mobile technology and design. The competition may give other chipmakers a chance to increase supplies to Apple, as the U.S. company may not want to be too dependent on Samsung, BGC’s Anvarzadeh said.

Apple already accounts for about 7.8 percent of Hynix’s revenue from selling NAND flash and DRAM chips, according to data compiled by Bloomberg.

Toshiba has proposed making a joint bid with Hynix for Elpida’s assets, the Nikkei reported April 5. If the two companies teamed up in a successful bid, Toshiba would probably take Elpida’s mobile DRAM capacity, while Hynix’s interest may be in converting Elpida’s PC DRAM production into NAND output, Dongbu’s Shin said.

Hynix may also want to bid up the price for Elpida so its competitors don’t pick up the company’s assets cheaply, Kim Hyung Sik, a Seoul-based analyst at Taurus Investment Securities Co., wrote in an April 2 report.

Revival Plan

Elpida plans to select a bidder as part of its restructuring plan in early May, a Toshiba executive said March 30. The deadline for final bids is April 27, a person familiar with the matter said.

Yukio Sakamoto, 64, Elpida’s president, is heading the company’s restructuring after getting court approval to serve as its trustee on March 23.

Selling Elpida, sitting on 448 billion yen ($5.5 billion) of debt, will have some obstacles. A buyer would have to spend $3 billion during the next 12 to 18 months to make it competitive again, making the deal risky, Bank of America Merrill Lynch said in a March 30 report. While Elpida’s creditors may ask for at least $3 billion to $4 billion, bidders may offer $2 billion at the most, according to the report.

Labor Force

Managing the chipmaker’s labor force also will be a burden, and for an overseas company, operating factories in multiple countries won’t be easy, said Seo Won Seok, a Seoul-based analyst at Korea Investment & Securities Co.

“You’d have to take all the engineers and make all this investment in facilities,” he said. “Be it Hynix or Micron or whoever, they won’t likely be very proactive in bidding because the takeover would give them a big burden.”

Elpida was formed through the 1999 merger of NEC Corp.’s and Hitachi Ltd.’s memory businesses. Japan’s government and banks bailed out the company in 2009 with 140 billion yen in financial aid and loans. The bankruptcy filing in February came after slowing PC sales cut demand for chips and the strong yen eroded earnings from overseas sales.

Shipments in the $32 billion DRAM industry fell 3.3 percent last year for the first annual decline in at least five years, according to data compiled by Bloomberg Industries.

“DRAM makers are still struggling with oversupply and weak demand,” Anand Srinivasan, a Bloomberg Industries analyst, said in a report today.

Elpida’s chip patents, accumulated through NEC and Hitachi, can still be attractive to bidders, Korea Investment’s Seo said.

“There can be some benefits,” Seo said. “An increasing number of people are thinking if you buy them cheaply enough, you can gain market share, and it won’t be too bad.”

To contact the reporters on this story: Jun Yang in Seoul at jyang180@bloomberg.net; Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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