Micron Technology (NASDAQ:MU) has done a lot of shareholder unfriendly things in the past. But last Friday's filing of a poison pill "rights offering" takes the cake. The document bears the date of July 20, 2016. But the time stamp on the SEC's EDGAR server says it wasn't accepted by them until "2016-07-22 17:16:12." Why post something on Friday after the market close? Why, to lose it for publication and speculation in the weekend financial press. Predictably, Micron was rallying strongly in the Monday pre-market, and as this is written, the stock is trading at $14.16, up 7.8% on the day.
What is a rights offering? There are lots of good ideas around. Here is one. Essentially, shareholders are given the right to purchase additional securities at a bargain rate once any shareholder goes over a set threshold. In classic anti-takeover scenarios, this level is typically at 20% of the outstanding shares. This particular rights offering, with a trigger of 4.9% and with its language on Section 382 of the IRS code, is styled as a rights offering to prevent a change of control that would jeopardize the company's Net Operating Loss Carryforwards.
And indeed, the company does have billions of NOLs as the most recent 10-K details on page 84:
So why would this rights offering, styled as one designed to preserve the company's NOLs expire in 2019, long before most of the NOLs expiry occurs? Because this is an anti-takeover rights offering masquerading as an NOL preservation rights offering, with its attendant 4.9% trigger point. That trigger point is set so low in NOL preservation rights offerings since the IRS examines changes in 5% position holders to determine whether there has been a change of control for tax purposes.
A 4.9% trigger and the board's unilateral right to grandfather and exempt shareholders of their choosing and to change other terms of the rights offering gives the Micron board ownership of the auction hall and auctioneer's gavel.
Who might Micron's suitors be? Much has been made of the Tsinghua bid for Micron and its unlikely success. I happen to think that some foreign participation in a bid is possible despite the frequent citations of CFIUS as a defense. As an example of sensitive transactions that have been possible under CFIUS, I'd offer up the sale of IBM's server business to Lenovo, despite the fact that business underpins much of our missile technology:
Lockheed Martin Corp., the world's largest defense contractor by sales and the supplier of the Aegis Combat System, said it is discussing the issue with the Navy. In response to a question about the inclusion of IBM servers in the Aegis Combat System, Keith Little, a spokesman for Lockheed Martin, said, "I can confirm that we are working with the U.S. Navy to ultimately select an appropriate course of action."
But I'd agree that a foreign buyer is not the likeliest suitor for Micron despite the fact that they might play in a deal as a financing source or licensee for some technologies.
Here's my short list, in order of likelihood:
- Seagate Technology (NASDAQ:STX). Seagate has watched recently as its competitor in the hard disk drive market, Western Digital (NASDAQ:WDC), gobbled up SanDisk to vertically integrate into the solid state drive market. With a market cap of only $9.5 billion, Seagate could be viewed to be swallowing a relative whale. Seagate is well known to the private equity world and spent a few years in the hands of tech buyout giant Silverlake before being taken public again. Now, Silverlake is even more fascinating in the non-volatile memory market, having enabled the going private transaction of Dell and now its lash up with storage giant EMC (EMC). Seagate needs to vertically integrate and so do Dell and EMC.
- Apple (NASDAQ:AAPL). Your scribe suggested Apple as a buyer back in November 2013. (OK so maybe I was a bit early). Now with Micron's advancements in 3D NAND and 3D XPoint, Apple might want to get at the head of both lines to freshen up its iPhone and iPad offerings. Apple remains the largest buyer of computer memory in the world. Its principal smartphone competitor, Samsung (OTC:SSNLF), is vertically integrated and must enjoy technology, lead time and market timing-dependent occasional cost advantages.
- Intel (NASDAQ:INTC). SA's very own Russ Fischer once wrote that Intel needed to own Micron in order to compete with Samsung. Intel seems to be making quite a splash in memory with its investment of $5 billion in Dalian, China. Perhaps life would be simpler for Intel without another partner owning IP and sharing ownership of IMFT. And to that last point, there is a put and call agreement for IMFT. But perhaps Intel has run out of patience or feels 100% ownership of Micron, now!, would make life easier? I ran a draft of this article by our own SA/Micron resident counsel Retired Securities Attorney. He reminded me that Intel already has rights to acquire 38 million shares expiring in 2063. See these SEC filings. Those contain this key bit of information: "2.2 Standstill Provisions. [a] Intel Capital shall not acquire, directly or indirectly, and shall not cause or permit any Affiliate of Intel Capital to acquire, directly or indirectly (through market purchases or otherwise), record or beneficial ownership of any Voting Securities of Micron representing, when taken together with all securities owned by such Persons, in excess of a percentage greater than nineteen and ninety nine hundredths (19.99%) (the "Standstill Percentage") of the Total Voting Power of Micron without the prior written consent or approval of Micron's Board of Directors; provided, however, that the prior written consent or approval of the Board of Directors of Micron shall not be required for the acquisition of any Voting Securities of Micron pursuant to the conversion, exchange or exercise of any of the Rights or any of the Additional Adjustment Rights or resulting from a stock split, stock dividend or similar recapitalization by Micron or resulting from any issuance to Intel Capital of Common Stock or other securities of Micron pursuant to the terms and conditions of the Business Agreement. Nothing contained in this Section 2.2 shall adversely affect any right of Intel Capital to acquire record or beneficial ownership of Voting Securities of Micron pursuant to any rights plan instituted by Micron. Ownership of Voting Securities by employee benefit plans or pension plans shall not be beneficial ownership by Intel Capital for purposes of this Section 2.2." So perhaps, according to the penultimate sentence in that standstill agreement, Intel is not covered by last Friday's poison pill and has the unilateral right to acquire up to 19.99% of Micron? I have never seen an analyst delve into this important but arcane stuff as has our own RSA. Kudos to RSA!
And what are the analysts saying? The first firm out with a comment that I've seen is Cowen, on July 25th. Here's their summary:
While the market is reading this as a precursor to a takeover, and it very well could be, we would note that given the sheer size of the NOL relative to its market cap this is a smart move. Regarding potential acquirers, INTC and China are obvious but neither are necessarily straightforward.
And here's a lot more color on Intel:
INTC ($34.66, Market Perform) is ultimately the most logical potential buyer and we have talked extensively about this, but there are issues here too. On one hand, 3DXP made in its JV with MU is really a key to INTC's future in Data Center ... and the way the JV with MU works, all of the rights flip in favor of MU at YE17 (e.g., as of 1/1/18 MU can buy INTC out of its stake at its own discretion - see below). But at this time, MU doesn't have the money to buy INTC out, so we doubt that INTC sees that as an existential threat to its memory efforts. Also, INTC's memory efforts currently are a ~$0.15/ year drag on EPS because, unlike startup costs related to MPU, it is spreading the startup costs for its Dalian China factory across a very small amount of NSG revenue. Thus, we are hard pressed to see INTC doubling down and committing that type of capital at this time to buy MU. So, it makes sense for INTC to ultimately own MU, but with MU lacking the capital it would take to buy INTC out of the JV, we would put this in the "why buy when you can rent" category.
Credit Suisse also issued a report on July 24 favoring Intel or the Chinese as a buyer:
We believe that the new agreement increases that possibility of strategic investment or acquisition in near term. There have been recent Media reports indicating that MU is in negotiation with China Inc. on establishing a JV for NAND manufacturing, and our recent checks suggest that INTC has slowed Dalian expansion - we believe that China or INTC could be potential investors or acquirers
On China as an investor, CS dispenses this wisdom:
We expect that >10% equity investment from China would trigger CFIUS review, which is viewed as unlikely to come through in case of memory investment; as a result investment is likely to be limited to <10% equity investment.
And CS has this on Intel as an investor:
Note that INTC has been building new capacity at Dalian - it could be cheaper for INTC to buy NAND capacity from MU than to invest in expanding new capacity at Dalian. INTC could secure more capacity at MU by making an equity investment in MU that could give them access to greater bits produced at cost at MU. The company could also acquire MU - the acquisition would come with cost synergies (duplication of R&D related to SSD, and cost of sales related to PC/Server), however may face regulatory hurdles (SSD/XPoint). The acquisition will also allow INTC to increase scale in manufacturing. Given replacement cost of $29bn, we could see potential price at 1x times replacement cost (assuming INTC buying for MU's Capacity) which would imply offer as high as ~$22 per share.
While I generally like Cowen and Credit Suisse, I'll stick by my shortlist above and the order in which I ranked suitors.
Conclusions. The Boise, Idaho, crowd has amply proven they are not a clever financial lot. They didn't put in a poison pill merely to protect NOLs - most of which expire long after the poison pill. I believe they put in a poison pill because someone is leaning on their door bell.
I would find it hard to believe that the company couldn't fetch the $25/share that is often bandied about replacement cost of $25 billion implies. In a report dated 7/24/2016, Credit Suisse put the replacement value at $29.2 billion.
I was in Minnesota a couple of weeks ago and had a chance to visit the irrepressible Russ Fischer in a nursing home where he is still recovering from a series of strokes and where he is hopefully being weaned off a ventilator, on which he must spend half the day. I can report that his salty language and tough demeanor is still with us. Hopefully, he's reading a few SA articles and some research reports. We talked briefly about innovations in WWII and I got a long discourse on the cavity magnetron - Russ's tech mind is still very much with us. He will enjoy a run up and takeover of Micron.
Disclosure: I am/we are long MU, INTC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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