Samsung Electronics has launched a hostile takeover of SanDisk Corporation, an American-based flash memory supplier, offering to pay $26 for each outstanding share in the company, which is 80% above the closing share price on September 15. The potential $5.85 billion deal shows that although the financial crisis in Europe and the US is reaching new depths, it is still business as usual on the Asia M&A front, as Samsung heads towards its largest ever acquisition.
That is if the deal goes ahead. SanDisk's board has unanimously rejected Samsung's "inadequate" proposal, saying that it undervalues the company long-term worth: "it is an opportunistic attempt to take advantage of SanDisk's current stock price, which is significantly depressed given industry cyclicality," says the company in a statement. The offer may be significantly higher than the company's current share price, but it is still 55% lower than SanDisk's 52-week high.
"The biggest merit of this deal for Samsung is the technology. It is a little behind SanDisk and Toshiba. It is developing its own products, but it can leapfrog ahead in terms of technology by leveraging on M&A," says one analyst.
Not only will the deal help improve the technology in Samsung's products, there are other benefits too. One major advantage relates to the market share – Samsung would end up with more than a 50% market share of the flash memory market, though this could provoke scrutiny from anti-monopoly commissions. It will acquire SanDisk's strong brand in the flash memory retail market and nor will it be required to pay an estimated $300 million a year in royalties to SanDisk.
With regards to paying for the deal, Samsung has announced that the deal does not hinge on any financing contingency. One research report pointed out that Samsung's net cash position at the end of the first half of this year was slightly less than the value of the deal, suggesting that Samsung may well have to a small amount of financing. But with Korean banks relatively healthy compared to their US peers, this should not be too problematic. Samsung has announced that it shall not be using any of its treasury shares to fund the purchase.
The acquisition however is fraught with risks. Samsung might have most of the money to hand, but going through with the deal would drain its net cash reserves, at a time when certain parts of its business, such as the LCD monitor sector, have serious problems with profitability. On top of that SanDisk is making a loss, $68 million in the second quarter of this year. The market for flash memory is extremely poor and things are not expected to get better: flash memory is even cheaper than it was in the second quarter, so the losses are ecpected to be even worse in the third quarter.
The deal shows a change in Samsung's strategy, which has focussed on organic growth over the last decade. As this kind of expansion has started to reach its limits, it is only natural for the Korean conglomerate to look outside itself for opportunities to grow; and distressed US companies are a good place to look.
The deal will hinge on whether Samsung is able to offer a price that the management is happy with or on whether it can persuade some of shareholders of the 80% institutionally held company that the company is good for SanDisk. Out of the 225 million outstanding shares, 180 million are held by 417 holders. The biggest owners are Clearbridge Advisors which has 17.5 million shares and FMR LLC, which has 14.6 million. The top five holders hold 27% of the company.
Advising on the Samsung side of the deal is JPMorgan. SanDisk is being advised by Goldman Sachs and Morgan Stanley.
Samsung launches hostile takeover of SanDisk
By Daniel Inman on Sep 18, 2008 4:20PM