A little over a year ago, Micron (NASDAQ:MU) entered into an agreement to buy the recently bankrupt Elpida. Toshiba, SK Hynix took a shot at buying Elpida and decided that the DRAM business was such a money loser that it withdrew. TPG was interested for a while. TPG is usually game for anything; it would pay a nickel to watch two frogs hop. However, TPG probably would have liquidated Elpida, so its offer went nowhere.
One by one the other bidders dropped out, leaving Micron's offer the only viable alternative that would operate the company and keep Japanese employed in the semiconductor business.
The deal closed on July 31, 2013, just ahead of the summer analyst meeting on August 9, 2013.
While we would have liked full pro forma financials, that detail will have to wait until Micron's 4th quarter earnings report sometime in October. It did, however, give some glimpse into the operations and the degree of accretion the Elpida acquisition will have on Micron's earnings.
This acquisition is truly remarkable in its timing, cost and effect on Micron and the entire electronics industry. At the time of the agreement, the DRAM business was so grim that the mere mention of acquiring Elpida returned disgusted looks from industry insiders. Shortly after the other bidders dropped out, Apple (NASDAQ:AAPL) flooded Elpida with mobile DRAM orders that were taken away from arch rival/supplier Samsung (OTC:SSNLF). That piece of business turned Elpida profitable for the first time in years. It also removed a thorn form Apple's paw since Samsung had it cornered on mobile DRAM. Then, five months after the agreement was signed, DRAM on 12/3/2012 began an unprecedented price rise of 100% in a period of six months.
Since Micron has become Apple's largest mobile DRAM supplier, what is to keep it from becoming a huge NAND supplier to the largest NAND customer in the world?
So, the Elpida deal that seemed like lunacy in July of 2012 looked like crystal ball genius by February-March of 2013.
Some other very bright people on Seeking Alpha will provide details and educated accounting guesses on what all this means. There will be ongoing discussions about acquisition accounting and asset write-ups, and recognizing income in the most favorable venue. Analysts who were caught flat-footed are furiously re-writing analysis over the weekend.
While all that is going on, I'm going to point out a few un-debatable facts about this incredible transaction:
1. While most acquisitions are completed at a premium to the acquired company's book value and market capitalization, with the excess going into the "Goodwill" account on the balance sheet, this acquisition was done at a multi-billion dollar discount to any rational valuation of the present day Elpida. I would challenge anyone to find an acquisition as immediately accretive to the acquiring company as Elpida is to Micron.
2. With this acquisition, Micron moves from a fairly weak fourth place memory supplier, that has had close encounters with the semiconductor Grim Reaper in the recent past, to the number one merchant market supplier of a broad line of memory products. Yes, number one. Yes, ahead of Samsung. Samsung divisions buy and consume about 50% of the memory output of Samsung semiconductor. Micron has suddenly become more important to the general electronics industry in the area of memory than Samsung. Micron has, overnight, gone from being a price follower to the price leader. DRAM production will be centered in Japan and Taiwan, while NAND production will be centered in Singapore. There are smaller, less efficient plants scattered around the world for both technologies, and these will be the marginal plants that will be slowed down or temporarily shuttered in the event of a short-term product excess. The cash cost to Micron to make this unbelievable transition is less than one billion dollars!
3. A very relevant way to think about the transaction is that for one billion dollars, Micron has acquired the equivalent of a SanDisk (NASDAQ:SNDK). Elpida has 2.4 million wafers of capacity per year; SanDisk has about 2.5 million wafers. We are told that Elpida has a revenue rate of $4.4 billion per year; SanDisk sales for 2012 were $5 billion. Elpida Gross margin is 47-53%; SanDisk gross margin for 2012 was 33%. Elpida Operating Expenses are 11-13%; SanDisk is 19%. SanDisk has a market cap of $14 billion minus $2.5 billion cash; Elpida cost Micron $1 billion and has $1 billion in cash. Elpida is free to Micron! Comparing with SanDisk, Micron received $11.5 billion of value for nothing.
The accounting experts on Seeking Alpha will have much more detailed numbers and they will be correct to a more or less degree depending on who is speculating about the numbers.
The bottom line is that Micron is now the swing supplier of memory to the electronics industry and it bought a company the size of SanDisk for nothing. Depending on the final 2013 numbers, the deal propels Micron from the 10th largest semiconductor producer worldwide to the third largest behind Intel (NASDAQ:INTC) and Samsung.