When we talk about Micron (NASDAQ:MU) as an investment, semiconductor technology immediately pops into our minds.
If the play here was just Micron with their 4.8 million annual wafer capacity for DRAM and NAND that has no distinguishing characteristics, I would find another home for my play money.
Micron today is about Elpida. Elpida is a magnificent company that got on the wrong side of an increasingly valuable yen and senselessly brutal DRAM pricing. As a result Elpida was forced into a bankruptcy that was headed for liquidation, until Micron came along.
Elpida is a combination of the memory divisions of Hitachi (OTC:HICTF), NEC, and Mitsubishi (OTC:MIELF). These companies individually were technology leaders a decade ago. They built some of the best and most reliable memories available in the market.
The real story here is that Micron was able to buy Elpida on terms that are hard to fathom today after DRAM prices have increased well over 100% from the November 2012 bottom, and the yen has weakened by 25% since the deal was proposed, thus making Elpida the lowest cost memory maker on the planet.
So the story here is not Micron, but Micron's acquisition of Elpida with 80% of the depreciation written away and a government sanctioned and driven weak yen. The cost of an Elpida wafer will be about 60% of the cost of Micron wafer.
A good way to think about the Elpida deal is if Toyota acquired a bankrupt Honda (NYSE:HMC) for nearly nothing and, in the course of the Honda bankruptcy, the depreciable assets of Honda were written down 80% and the cost to build a Honda was 60% of the cost of an equivalent Toyota (NYSE:TM).
The point of the Micron/Elpida merger is that it is more a crazy favorable financial deal than a technology story.
You can get a hint of what we might see after the closing of the acquisition by spending some time with the Pro Forma published back in February ( Page four under "Unaudited Pro Forma Condensed Combined Financial Statements", about 2/3 of the way through the document). The Pro Forma for the Elpida quarter ended September 30 shows $777 million as cost of goods sold. The Pro Forma adjustment (mainly depreciation) was $196 million, making the adjusted cost of goods sold $581 million. We now know that Elpida has capacity of 200,000 wafer starts per month. So, dividing $581 million by 600,000 wafers for the quarter gives a cost per wafer of $968. Using the Micron numbers on the same page and doing the same calculation ($1.617 billion cogs/1.02 million wafers), gives $1585 cost per wafer. The Elpida wafers will cost about 61% of the cost of Micron wafers.
The Elpida part of the story gets even better. The Elpida operation supplies primarily premium priced mobile drams. A 300mm wafer of 4Gb mobile DRAM probably yields 700 parts. We can assume a price of $4.50 (which is probably low), which gives a revenue per wafer of $3150 or 69% gross margin. All R&D, SGA, and "other" amounts to $245 per wafer. The result, $1937, is operating profit per wafer. At Elpida, operating profit, due to tax loss carry forwards, is approximately net profit. That is $1.162 billion profit for Elpida alone … for one quarter. By these calculations the Elpida contribution to Micron earnings could be $.97 per share per quarter.
These numbers sound crazy even to me, but the calculations are correct. The only things that could throw them off would be if Elpida was not running at the full 600,000 wafers for that quarter or they are giving away parts to Apple (NASDAQ:AAPL).
The absolute worst case is that, due to reduced depreciation, Elpida wafers will cost $326 per wafer less than the pre-bankruptcy cost ... and that number only gets better if Elpida was not running at full capacity.
DRAM prices would have to come down a long way before this deal is anything but the sweetest acquisition that I have ever seen.
We will wake up tomorrow morning with news of the closing, finally. Then the analyst speculation begins. Don't expect any new Pro Formas from Micron tomorrow (It would be nice if they would give the "company owners" a heads up). Micron is doing an investors conference in New York on August 9, it would near crime to not have Pro Forma numbers by then.
You heard it first on Seeking Alpha.