In January 2007 we wrote an article titled "Micron Technology: Takeover Target For Private Equity?" Now, five months later, we analyze further rumors on Micron Technology (NASDAQ:MU).
A Divisive Stock
Micron develops memory, and has some specialization in the Flash memory business. Over the past month, several financial firms have upgraded MU based on DRAM pricing improvement; UBS and Avian have both come out with very positive notes on MU related to pricing. On the other hand, Deutsche Bank came out with a negative note on MU in late March citing possible memory operation losses and the downside risk to consensus estimates. In early April there were several other downgrades and upgrades on MU.
As we can see, there has been significant division in opinions of MU.
Micron Takeover Rumors
At the same time, however, takeover (and more specifically LBO) rumors have circulated on the company. Over the past few months, Blackstone has been the rumored bidder. Option activity for MU has soared.
Recent call buying in MU suggests that people "in-the-know" could be positioning themselves ahead of such an announcement.
Since January, the market cap of MU has dropped almost 20%, from $11B to $9B. This drop has created a prime opportunity for an acquisition or leveraged buyout to occur.
Blackstone as a Buyer
Recent speculation has put Blackstone as the buyer of MU. Most recently the offer is rumored to be at $16 per share.
The Idaho Statesman recently reported on 5-26-07 that:
The idea that Blackstone would buy a semiconductor company isn't unprecedented.
Last December Blackstone led a consortium of private equity funds in a $17.6 billion buyout of Austin-based Freescale Semiconductor. The buyout was for $40 a share, which was a 36 percent premium over the company's then-current price.
A leveraged buyout by Blackstone is certainly possible, especially at the current pricing of MU.
Further Analysis of a Goldman Sachs LBO
As of December 31, 2006, Goldman Sachs Asset Management held 50,186,150 shares of Micron stock. (See SEC Filing) Rumors were circulating that GS was leading the leveraged buyout efforts. However, in early April GS downgraded MU to sell and cut the price target to $10 from $12 stating that:
By [the calendar second quarter] we estimate Micron will have lost as much in the first two quarters of the current downturn as it earned in the recent upturn... The market appears excited about improving DRAM prices after Micron called a bottom... post a few days of stable DRAM spot prices. We believe this situation is untenable, as our bottom-up supply/demand analysis shows significantly excess DRAM supply throughout 2007 driven in large part by the transition of NAND capacity to DRAM production which won't come online until [the second half]. While we expect NAND pricing to improve, Micron is likely to continue to generate losses in NAND given its poor cost structure and DRAM sales still drive the majority of revenues.
It is always possible that GS has sold their stake in MU. To me it seems silly that they would downgrade a stock that they hold so much of unless they are looking to lower the price for their own leveraged buyout of MU, or unless they had sold their position, which would effectively remove themselves from being a buyer.
While a takeover is still possible from companies like Intel (NASDAQ:INTC) (who currently has joint ventures with MU), it seems that a leveraged buyout is more likely yet. Certainly recent call option activity suggests that some positive announcement is imminent.