SanDisk: Does No Really Mean No?

Is SanDisk’s (SNDK) management team insane?

You have to wonder what they’re thinking. As you know by now, Samsung revealed yesterday that it has offered to buy the company for $26-a-share in cash, a large premium to the recent share price. And SanDisk revealed that it had already rejected the offer as way too low. SanDisk also asserts that Samsung is less interested in buying the company than it is gaining some leverage in the ongoing but stalled negotiations for a new licensing agreement covering Samsung’s use of SanDisk’s NAND-related patent portfolio.

The Street seems a little baffled by SanDisk’s rejection of the Samsung offer. After all, the outlook for the NAND flash market is grim; prices have been plummeting, amid industry oversupply and softening demand in key end markets like PCs and mobile phones. The companies clearly don’t like each other much; all you need to do to get a sense of that is to read the letters the two companies sent each other, which I posted in full on the blog yesterday.

So what happens now?

Well, there are a couple of possibilities. Let’s run through them:

• Samsung goes hostile. They already sound hostile; what they could do next is actually launch a tender offer, and take the deal to shareholders. Hostile takeover bids in the tech business are rare indeed, and they often fail. (Think Electronic Arts and Take Two, or Microsoft and Yahoo.) Oppenheimer’s Daniel Morris points out in a research note that Samsung has not completed a major acquisition since 1997, when it spent $467 million for AST Research, “which it later dissolved.” (Remember AST?)
• SanDisk recruits a white knight. The most frequently mentioned alternative bidder is Toshiba, which has a joint venture with SanDisk to manufacture NAND. A few analysts think a Toshiba bid is likely, if only to protect its position in the JV. But Citigroup’s Craig Ellis notes that Toshiba may not have the financial resources to pull it off: he notes that Toshiba is highly leveraged, with $2.8 billion in cash and $14.7 billion in debt. In the current financial crisis, it might be difficult them to finance a deal which would likely cost $6 billion or more. Seagate (STX) has said it isn’t interested in bidding. After that, the list of potential suitors looks pretty thin.
• Samsung ups its bid. That’s always possible. But you have to wonder, given the level of vitriol between the two companies, and the fact that they have been negotiating for more than 4 months, if boosting the offer by a couple of bucks would change the mind of SanDisk’s board. And you also have to wonder if Samsung would be willing to dramatically increase what already looks like a premium bid, given the very ugly conditions in the NAND flash market.
• Samsung walks, waits for SNDK shares to drop, and bids lower: That’s the strategy some theorized Steve Ballmer was talking with Yahoo: watch fundamentals deteriorate, and wait for the target (and the Street) to come begging for a new bid, even at a lower price. Possible, but imagine how poisonous that round of discussions would be.

So that all leads to these questions: What should the company do? What will it do? And what should shareholders do?

Holders ought to pare positions, says Citi’s Ellis. “Abysmal fundamentals through mid-’09 argue to pare positions here,” he says. Cowen’s Daniel Berenbaum, who has been a bear on the stock, says that it is “tough to short the stock again until we gain clarity on posturing versus reality in what is now a public war of words.” Heidi Poon, an analyst at Thomas Weisel Partners, notes that “current fundamentals do not support a price target of $26.”

Betty Van Hees, an analyst at Caris & Co., sees downside risk in the stock, asserting that Samsung is not likely to make an immediate counter bid, and that rescue from Toshiba or Seagate is also unlikely. Van Hees says she was “disappointed and surprised” by rejection of the Samsung offer, and complains that the SanDisk board is “looking in the rear-view mirror through rose colored glasses.”

Several analysts are looking at it another way: the company takes the deal, or spends a lot of time in court. Vijay Rakesh, an analyst at ThinkPanmure, contends SanDisk now faces the choice of either taking the offer, or getting into prolonged litigation with Samsung over the licensing issue, “which we believe SNDK cannot afford given the state of the NAND industry.” Sounding a similar theme, Raymond James analyst Hans Mosesmann cautions that rejection of the deal “basically guarantees a hostile battle on the legal front regarding the licensing renegotiation next year,” noting that Samsung can afford “long battles of attrition,” which SanDisk may not.

SanDisk today is up $5.97, or 39.7%, to $21.01.

Comments

[carpe_diem:]

Wall Street should embracing Koreans investing these days. They are much friendlier to US than Chinese in the long term.

2008 Sep 17 03:53 PM

[sardinero:]

Dr. Eli Harari is pure Greed in its best form.

2008 Sep 17 04:17 PM