The much maligned computer memory industry is utterly essential to virtually every corner of the digital electronics industry. Without memory nothing happens. Without cheap memory not much happens. Customers of the memory industry seem to forget, in their zeal to push prices ever lower, that their fortunes are intimately intertwined with the health of the memory manufacturers.
A year ago the industry came to the precipice. The DRAM players were Samsung (SSNLF.PK), Hynix (HXSCF.PK), Elpida (ELPDF.PK), and Micron (MU). Unless you pay deep attention to the industry (my cross to bear), you wouldn't notice that the mobile DRAM players were Samsung, Hynix, and Elpida. Micron had taken the performance path for servers and high performance computing and couldn't build low power mobile DRAM.
That would leave Samsung, Hynix, and Elpida. Hynix was not in great financial shape and Elpida had "one foot in the grave and one on a banana peel."
It wouldn't take a great deal of imagination to see that the mobile DRAM users could find themselves in the very uncomfortable position of being sourced by the duopoly of Samsung and a shaky Hynix. Both of which had all their production capacity about 85 miles from the Korean DMZ, with a cuckoo bird in charge of North Korea.
Elpida got in trouble due to the pricing policies of those that would have been left standing and the increasing value of the Japanese yen. Elpida is an extremely competent manufacturer of the most difficult kind of memory. The company is made up of the memory remnants of NEC, Hitachi (HICTF.PK), and Mitsubishi (MIELF.PK), all of which were technology leaders in the memory business. In February of last year, Elpida was rapidly headed for bankruptcy and liquidation. The memory pricing environment was such that Elpida couldn't find a buyer for the company at any price. The company was at risk of extinction in an equipment auction. The consensus was that a buyer of a DRAM company would have to be a victim of collective insanity.
The following series of events happened in a surprisingly compressed time frame:
- February 14, 2012 the Elpida bankruptcy becomes obvious because the Japanese government refuses further support.
- February 27, 2012 Elpida actually files for bankruptcy protection.
- February 28, 2012 The IMFT (Intel (INTC)-Micron Flash Technology) joint venture is re-negotiated. The JV redo involves an "enhanced JV" where Intel sells to Micron the Intel interest in the IMFT fabs in Singapore and Manassas, VA for $600 million. $300 million cash and $300 to remain on deposit with Micron for payment for future NAND chips. These fabs had a replacement cost of perhaps $8 billion, with Intel's interest worth about $4 billion. Selling the Intel interest in the fabs for $600 million was tantamount to a "Phantom Transfer" of over $3 billion in appraisable value to the Micron balance sheet. It also sent to the Japanese a message that Intel was indirectly standing behind any offer that Micron would make on the Elpida operation.
- May 4, 2012, Hynix (not in great financial shape themselves) withdraws from the bidding for Elpida.
- May 10, 2012 Micron confirms rumors that they are in discussions to acquire Elpida as a continuing operation.
- May 16, 2012 Industry sources reveal that Apple (AAPL) has contracted with Elpida (still officially in bankruptcy) for mobile DRAM that represents half of the output of the Hiroshima fab. We need to pause and think about that for a minute. Apple essentially bet the company on a supplier of an essential product that was in bankruptcy proceedings.
- July 2, 2012 Micron announces sponsorship agreement to acquire Elpida Memories.
- February 28, 2013 Tokyo district court approves the acquisition of Elpida by Micron.
- March 29, 2013 A small group of unsecured creditors file an appeal, which can only delay the closing of the acquisition.
- May 15, 2013 Tokyo High Court dismisses the appeal and allows the acquisition to proceed.
So, another month of paperwork and Elpida is saved from extinction and will be combined with Micron. Can there be any doubt that Micron, Apple and Intel cooperated in the operation to save Elpida?
Micron, overnight, becomes the world's second largest memory company. Actually Micron becomes the world's second largest processor of silicon wafers behind only Samsung. Since a great deal of Samsung's memory capacity is used to support their own internal requirements, Micron becomes the largest merchant market supplier of DRAM and, therefore, the swing player in the memory business.
Mark Adams, president of Micron, has indicated in a presentation to Goldman Sacks (12 minute point), that the combined company will have total revenue of $16 billion, and there have been substantial price increases in memory since he made that observation. This will be a complex combination, but the future earnings of Micron will be measured in dollars per share.
If fear of Samsung mobile DRAM blackmail has kept Apple from moving its "A" chip business to a less competitive supplier, as I think, it will be able to make that move now without fear of memory retribution by Samsung. The Apple business will move from Samsung. The debate over whether the business goes to Intel or TSMC (TSM) will soon be over. My bet, since Intel played a big role in saving Elpida, to Apple's distinct benefit, they will get the "A" chip business with or without the ARM (ARMH) cores.
This is a huge and important event and the fact that MU, INTC, and Apple cooperated to pull it off will never be found in a business article. Far less important subjects are analyzed to death by the business media. Not this one.
The industry dodged a bullet (or howitzer round) and the analysts are silent about how it happened.