M-Systems Investors, Don't Be Disappointed By SanDisk Acquisition

 |  Includes: FLSH, WDC
by: Shlomi Cohen

I’m sure that the longstanding shareholders in M-Systems Flash Disk Pioneers Ltd. (Nasdaq: FLSH) were bitterly disappointed by the sale price of only $1.55 billion for the company, just $36 per share, which is less than its peak price this year.

They are disappointed because they believed that M-Systems chairman, president and CEO Dov Moran when he recently said, “Why should I sell when I can become the Israel’s next Teva?” There will not be another Teva in the flash memory field, because there has already been one for a long time - SanDisk Corporation (Nasdaq:SNDK).

SanDisk is a US corporation headed by several Israelis in addition to its founder and CEO Eli Harari, and it has a branch in Tefen in the Galilee. The combined sales of SanDisk and M-Systems will be around $4 billion in 2006, a quarter of which will come from SanDisk’s new branch in Kfar Saba - M-Systems.

I am not disappointed, because SanDisk’s acquisition of M-Systems is a share-swap deal. Today, I am trading in my small not-very-safe M-Systems mini for a stable SanDisk limo. As I’ve written before, the difference between the two companies is that SanDisk owns its own gas station where it can refuel without worrying about shortages of one kind or another, whereas M-Systems is dependent upon others.

The fuel in question is NAND processors, without which neither company is worth anything. All the analysts in the sector constantly write about surplus supply or stability in the NAND flash processors market. NAND will be the dominant data storage solution for mobile devices in the years ahead.

On the basis of what I’ve heard from Harari and Moran in the past couple of months, there is a greater chance that this market will face a shortage, despite the entry of new players, such as Hynix Semiconductor Co. Ltd., Intel Corp. (Nasdaq:INTC), and Micron Technology Inc. (NYSE:MU). Under these circumstances of a possible shortage, Moran had no choice but to abandon his strategy of partial contracts and hook up with a large manufacturer and the owner of the patents on NAND MLC - SanDisk.

It has already been demonstrated this year that a partial contract, such the one M-Systems signed with Samsung Corporation, is not worth the paper it’s written on when a huge customer such as Apple Computer Inc. (Nasdaq: AAPL) comes along, and causes Samsung to divert its flow of processors away from M-Systems.

Technically speaking, the shares of M-Systems and SanDisk will both continue to be traded together until the deal is closed during the fourth quarter. However, from today, they will dance a tango, rising and falling together at the same rate, on the basis of the ratio agreed to in the contract; in other words, the price of an M-Systems share will equal 0.76 times the price of a SanDisk share. Any positive announcement by SanDisk will move both shares upward, and any negative announcement by SanDisk will move both shares downward.

When the deal is closed, all M-Systems shareholders will receive SanDisk shares on the basis of this 0.76:1 ratio.

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.