Will SanDisk Be Able to Keep Samsung?

The latest bombshell from the stocks in my portfolio, tracked by "Globes", has been provided by SanDisk Corporation (SNDK). On Monday in Korea, Toshiba and Samsung Electronics Co. Ltd. announced a mutual licensing agreement for a specific type of NAND chip called OneNAND. This is a pivotal agreement, not because of the details it contained but by virtue of the very fact that these two companies are collaborating.

It is well known that there is not much love lost between Toshiba and Samsung, to put it mildly. They are competitors for the multi billion dollar market for NAND chips for the hottest gadgets on the market, most notably, all of Apple Inc.'s (AAPL) product lines. The competition in this market is exceptionally fierce, and companies often end up shooting themselves in the foot, just to put others out of business.

SanDisk, it will be recalled, receives hundreds of millions of dollars a year in royalties a year from Samsung and others for the use of its patents in the production of SLC and MLC NAND chips. The agreement between Samsung and SanDisk expires in August 2009, and some people believe that the fall in SanDisk's share from the $60 high of recent months to the recent low of $34 is not the result of falling chip prices due to oversupply, but rather, the uncertainty surrounding the future of this agreement.

For some time now, there have been serious concerns on the market that Samsung will either not renew its contract with SanDisk, or refuse to continue paying the current rate of royalties, which is considered quite high. Samsung has also been hinting for several months, that it has developed alternative technologies of its own which, in future, will free it from the heavy royalties it is paying SanDisk. One such technology that it has been mooting in recent months is the one that Saifun Semiconductors Ltd. (SFUN) claims may have been stolen from it, and the Spansion management could well decide there are grounds for legal action against Samsung at some point in the future, once its acquisition of Saifun is closed.

Toshiba and SanDisk, as is known, jointly own NAND chip fabs in Japan, and Monday's agreement with Samsung gives, I feel, an inkling of the likelihood that the SanDisk-Samsung agreement will indeed be renewed in 2009. It has been known for some years that Toshiba did not take kindly to the fact that SanDisk licensed its MLC patents to Samsung, a move that made SanDisk a lot of money, but which also boomeranged by increasing competition, and bringing down Samsung's prices and ended up with Toshiba as the second major player in the industry, after Samsung.

SanDisk recently hinted that the issue of the renewal of its agreement with Samsung would be settled long before the current arrangement lapses, and I believe that should an announcement to this effect be forthcoming in the near future, SanDisk's share will stage a strong rebound. Goldman Sachs, for example, which currently rates SanDisk "Buy" with a target price of $55, attributes $45 of this price to the company's revenue from royalties, $5 to product sales, and the other $5 to its net cash level.

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.