Intel, Micron And Apple: The Memory Thing

Includes: AAPL, INTC, MU
by: Russ Fischer

Sometimes I think that we don't give large corporations enough credit for long-term thinking.

An example of this is computer memory. For the sake of this article we will define computer memory as DRAM and NAND Flash memory.

Intel (NASDAQ:INTC), for example, becomes a toothless tiger with all their technology unless the users of their computer technology have access to multi-sourced, fairly priced memory chips. Apple (NASDAQ:AAPL), in turn, would be unable to produce and sell their iDevices without a reliable supply of the massive amount of NAND Flash and DRAM that are used in every product built by the company. Micron (NASDAQ:MU), as the last western hemisphere producer of any kind of memory has lived on the edge of extinction while all European and most Japanese memory suppliers have ceased operations.

With that background, we can consider, with some interest, the NAND Flash joint venture formed by Intel and Micron in 2006, some seven years ago. Intel apparently recognized the importance of NAND memory to their very ability to sell their ever more powerful microprocessors. IMFT (Intel-Micron-Flash-Technologies) collaborated to build a multi-billion dollar NAND fab in Singapore with a design capacity of 100,000 wafer starts per month. Two other fabs are included in IMFT, one in Utah and one in Manassas, VA (bought from Toshiba in 2002)

Fast forward to early 2012. Suddenly the DRAM business is in jeopardy of becoming concentrated in two South Korean companies, Samsung (OTC:SSNLF) and Hynix, with Micron playing a minor and vulnerable role in the DRAM business. This is caused by the imminent bankruptcy and dissolution of Elpida Memories of Japan, itself a consolidation of the former memory operations of NEC, Hitachi, and Mitsubishi. Now the memory problem has become a serious problem for Apple, who considers Samsung a life and death competitor. The doubt surrounding the supply of memory and, in particular, mobile DRAM has Apple frozen in place with Samsung as the supplier of Apple "A" chips and the mobile DRAM that goes with them . Intel, faced with the possibility of the concentration of DRAM suppliers into Samsung and Hynix, is feeling significant discomfort and they are prevented from taking the Apple "A" chip business for fear that Samsung could cut off mobile DRAM to Apple.

The simple solution is to save Elpida because once it is auctioned off it will never be reproduced. Intel or Apple don't want to be in the memory business at that point, and with their perceived deep pockets would have to pay a small (or large) fortune for Elpida. Micron, on the other hand, has a desperate need for the scale that Elpida would bring to Micron. The problem is that Micron, due to the very conditions that threaten to drive Elpida out of business, is not in ideal financial shape to take on the multi-billion dollar acquisition of Elpida.

Consider this timeline:

February 14, 2012 the Elpida bankruptcy becomes obvious because the Japanese government refuses further support.

February 27, 2012 Elpida files for bankruptcy protection.

February 28, 2012 The IMFT joint venture is re-negotiated. The JV redo involves an "enhanced JV" where Intel sells to Micron the Intel interest in the IMFT fabs in Singapore and Manassas, VA for $600 million. $300 million cash and $300 to remain on deposit with Micron for payment for future NAND chips. These fabs had a replacement cost of perhaps $8 billion, with Intel's interest worth about $4 billion. Selling the Intel interest in the fabs for $600 million was tantamount to a "Phantom Transfer" of over $3 billion in appraisable value to the Micron balance sheet. It also sent to the Japanese a message that Intel was indirectly standing behind any offer that Micron would make on the Elpida operation.

May 4, 2012, Hynix (not in great financial shape themselves) withdraws from the bidding for Elpida.

May 10, 2012 Micron confirms rumors that they are in discussions to acquire Elpida.

May 16, 2012 Industry sources reveal that Apple has contracted with Elpida (still officially in bankruptcy) for mobile DRAM that represents half of the output of the Hiroshima fab.

July 2, 2012 Micron announces sponsorship agreement to acquire Elpida Memories.

February 28, 2013 Tokyo district court approves the acquisition of Elpida by Micron.

March 29, 2013 A small group of unsecured creditors file an appeal, which can only delay the closing of the acquisition.

By June or July, the Micron/Elpida deal will close. Elpida will have been saved. In the process Micron will become the world's second largest manufacturer of NAND and DRAM memory, with only about 10% less production capacity than Samsung. Apple now has a dependable non-Korean source for mobile DRAM and is now able to move their "A" chip business away from arch rival Samsung, probably to Intel. Intel, for their part, can now relax that the customers for their microprocessors will not be blackmailed for memory by Samsung. Since much of Samsung's memory output is used internally by their own divisions, Micron actually becomes the world's largest merchant market memory supplier and will thus be the swing player in the memory business.

The acquisition is denominated in yen, so since the agreement has been made, the yen has fallen in value by about 20%, thus reducing the price to Micron for Elpida by $500 million.

Also, since December the spot price of DRAM has risen by about 115% and the contract price has risen nearly 100%. NAND memory has had price increases of about 30% in that same time frame. The effect of this is that when the Elpida deal closes, Micron becomes a profitable company with revenue between $16 and $20 billion overnight.

The IMFT JV is still intact and revised to include all "emerging memory technologies." We haven't heard the last of that relationship since Intel will need an immense amount of NAND memory for solid-state drives to sit next to the Haswell processor chips being ramped into production during the last half of 2013.

I hope nobody thinks that the Micron/Elpida deal happened without a little help from Micron's friends.

The immediate play, of course, is to buy Micron. For many other reasons, Intel is also a buy. When Apple can announce a complete break with Samsung, the stock could rise $100.

Disclosure: I am long INTC, MU. 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.