The potential $5.85 billion M&A deal shows that although the financial crisis in Europe and the US is reaching new depths, it is still business as usual in Asia, as Samsung heads towards its largest ever acquisition.
That is, if the deal goes ahead. SanDisk's board has unanimously rejected Samsung's ôinadequateö proposal, saying that it undervalues the company's long-term worth: ôit is an opportunistic attempt to take advantage of SanDisk's current stock price, which is significantly depressed given industry cyclicality,ö says the target in a statement.
The offer of $26 per share is at an 80% premium to SanDiskÆs closing price on Tuesday before the offer was announced and a 93% premium to SanDiskÆs closing price on September 4, the day before media started speculating about a takeover. But it is still 55% below SanDisk's 52-week high of $56 and that could be what SanDiskÆs board is holding out for.
ôThe 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,ö says one analyst.
And there are other benefits too. One major advantage relates to market share û Samsung would end up with a more than 50% share of the flash memory market, though this could provoke scrutiny from anti-monopoly commissions. It would also acquire SanDisk's strong brand in the flash memory retail market and would no longer be required to pay an estimated $300 million in royalties that it currently shells out to SanDisk every year.
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 raise a small amount of finance. But with Korean banks relatively healthy, especially compared to their US peers, and eager to finance the aspirations of local firms to go global, this should not be problematic. Samsung has announced that it will not use any of its treasury shares to fund the purchase.
The acquisition is, however, fraught with risks, say analysts. Samsung may have most of the money on hand, but going through with the deal would drain its net cash reserves û 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 currently loss-making, with a $68 million shortfall 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 chips are even cheaper than they were in the second quarter, so the losses are expected to worsen in the third quarter.
Samsung has been driven to launch the hostile takeover by what it perceives as ôunrealistic expectations on both [SanDiskÆs] standalone market value and an appropriate merger priceö, it wrote in a letter to SanDiskÆs board yesterday. Samsung went on to comment: ôThe world has changed dramatically in the past 52 weeks as can be seen from SanDisk's own disappointing results.ö
The deal shows a change in strategy at the Korean conglomerate, which has focused on organic growth over the past decade. As this kind of expansion has started to reach its limits, it is only natural for Samsung to look outside for opportunities to grow; and distressed US companies are a good place to look. Samsung is following in the footsteps of fellow Korean chaebol Doosan Corp which in July 2007 announced KoreaÆs largest ever outbound acquisition, paying $4.9 billion for Ingersoll RandÆs bobcat division.
The deal will hinge on whether Samsung can persuade enough shareholders in SanDisk, which is 80% owned by institutions, to tender their shares. The biggest owners are New York-headquartered Clearbridge Advisors, which has 17.5 million shares, and FMR (the umbrella company for Fidelity's holdings, previously known as FMR Corp) which has 14.6 million. The top five shareholders own 27% of the company. And Samsung may have chosen its timing well. In the current depressed equity market environment, shareholders may either buy into the cash is king mantra or decide to sell simply because other buy opportunities on the US bourses are compelling.
A further uncertainty lies in whether JapanÆs Toshiba Corp, who has a joint venture with SanDisk, will decide to enter the fray. Some analysts have suggested that Toshiba is a better fit for SanDisk and certainly the Japanese firm shares the advantage of access to a banking system flush with funds.
Advising on the Samsung side of the deal is J.P.Morgan. SanDisk is being advised by Goldman Sachs and Morgan Stanley.
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