To Be or Not to Be?

Truth be told, I fully expected SanDisk to emerge from this downturn, stronger than ever.

After all SanDisk has great IP, leading edge technology, best costs and an ace in the hole with Matrix 3D R/W- wonderfully positioned as the potential successor to NAND.

SSDs are right around the corner and the mobile demand for flash memory looks to be shaping up as the monster many have hoped it would be.

The golden era of solid state memory is almost upon us. With a few breaks, SanDisk could be sitting pretty by 2010.

That is, if SanDisk is here at all.

Blood’s in the water and the sharks are circling.

Samsung, the biggest and baddest, has an acquisition offer on the table at $26/share. $26/share cash- not contingent on financing arrangements.


Samsung no doubt has many reasons in wanting to acquire SanDisk. SanDisk’s card business and real-world manufacturing expertise is valuable, but reason numero uno has to be SanDisk’s portfolio of patents.

Samsung is currently paying SanDisk roughly $350 million a year in patent licensing fees. Take out SanDisk, and those licensing fees evaporate. And possibly even as sweet, others will be obligated to license, at a price- from Samsung.

Samsung signed its current 7 year licensing agreement with SanDisk in August of 2002.

This deal will expire in August 2009. Negotiations on license renewal have been going for a while now. As would be expected, Samsung and SanDisk don’t see eye to eye.

This is the third time around for SanDisk and Samsung. The first core licensing agreement covering design and manufacture of flash memory products was signed in August of 1997.  Samsung didn’t want to sign then either.

It took two years of litigation, and an adverse ruling from the ITC for Samsung to come around.

Round two in 2002, wasn’t so friendly either. Samsung decided to go offensive, filing a patent infringement suit against SanDisk in March 2002. The suit proved only another unsuccessful strategic ploy. Samsung caved on schedule in August 2002, dropping its lawsuit and re-signing the core agreement with SanDisk, albeit at the last minute.

Today, Samsung appears as reluctant as ever to re-sign. No lawsuits this time. Samsung has upped the stakes to acquisition. Time will tell if this new strategy will be a success.

So far SanDisk doesn’t appear either intimidated or all that interested in being acquired. Samsung’s overtures have been met with a polite “No.”

FWIW, to my mind, it seems clear that Samsung is trying to frame the game as “heads I win, tails you lose”  at a time of max pain for SanDisk. If the market forces SanDisk into Samsung’s waiting arms at $26 share, Samsung acquires its licensor and reduces overall costs by direct ownership of IP.

If, on the other hand, SanDisk were to settle for far-reduced rates on the core licensing agreement, Samsung might just be willing to back off.

Either way Samsung wins.

A Curious Twist of Karma?

A curious twist of karma could prove Samsung’s undoing.

Way back in late 2005, Samsung made a calculated decision to hang msystems out to dry. Bad idea.

In late 2003 Samsung and msystems had signed a strategic agreement whereby Samsung would supply msystems with NAND in exchange for access to msystems’ IP.

Samsung had the NAND, msystems (FLSH) had the IP.  Seemingly a nice fit.

Then late 2005 Apple came a knocking at Samsung’s door. Samsung didn’t blink an eye in handing Apple the NAND destined for FLSH. FLSH would have to suffer. What was tiny FLSH going to do?  Terminate its licensing deal and litigate?

As it turned out, that’s exactly what msystems did. Although it has taken a couple of years, on May 16, 2008, an arbitration panel rendered a final award in favor FLSH (a division of SanDisk now.) Samsung continued trying to squirm off the hook for a few more months, but threw in the towel on September 22, 2008. (Thanks DanR)

[6 October Edit- I just skimmed the 37 page arbitration award and have edited the my original text below. I was wrong about a cash award being given.]

When msystems terminated its Samsung strategic agreement, the press thought the most important patents in question were those which covered embedded hybrid bootable NAND devices widely used in both consumer electronics and cell phones.  msystems had figured out how to use NAND flash in place of NOR. Compared to NOR alternatives, these hybrid NAND devices have greater data-storage capacity, performance advantages and are much less expensive.

Samsung’s first embedded hybrid NAND device was its wildly successful OneNAND.  By November 2005 Samsung was producing more than three million units of OneNAND per month. OneNAND led to moviNAND and Flex-OneNAND- a whole portfolio of products now billed by Samsung as fusion memory.

If that weren’t enough, Samsung has also licensed OneNAND to STM, Denali and others.

While it may be true that Samsung’s embedded hybrid NAND products are based on msystems’ IP, according to the arbitration ruling, the patents Samsung most covets are x4.

Apparently while the agreement was in place, Samsung had access to msystems IP for the life of its patents and x4 would have been included.  With this ruling Samsung is on the outside looking in. I particularly liked these paragraphs from today’s WSJ:

The document says Samsung argued “strenuously” that without the license under the 2003 agreement — which extends for the life of msystems’ patents — Samsung would be forced to seek rights to the X4 technology by negotiating an extension of its separate licensing agreement SanDisk. Samsung argued that a loss in the arbitration would give SanDisk leverage to press for additional royalties on X4 technology “that could potentially cost Samsung billions of dollars,” the arbitrators wrote.

A spokesman for Samsung said the company lawyer who testified was “referencing royalty payments that SanDisk may have tried to demand over a prolonged period of time. This was certainly not any indication of what Samsung was willing to pay for a license.”

He pointed out that SanDisk only paid $1.5 billion for msystems less than a year before the comments were made. “Samsung continues to believe that its $26 per share offer to acquire SanDisk represents full and fair value for the company,” he said, adding that Samsung withdrew the federal suit because the company concluded it was unlikely to succeed.

A SanDisk spokesman offered a different interpretation. “Samsung made statements under oath about the value of our intellectual property and then, after making its lowball offer, suddenly pulled its own legal filing to avoid disclosure of its own testimony,” he said. “We believe Samsung did this to avoid disclosing the potential value and royalty stream associated with our technology, including X4,” which SanDisk believes “is substantial and potentially massive.”

Talk about a validation of IP. It looks like Stratosphere (x4) is going to be a big deal after all- at least Samsung thinks so. According to the arbitration document, as msystems was acquired by SanDisk, the current Samsung licensing agreement with SanDisk allows Samsung to utilize msystems’ technology, but only until 2009. Then its going to be time to pay the piper.

Those license renewal discussions between Samsung and SanDisk must be getting pretty interesting. Reading the tea leaves, I am guessing that SanDisk muddles through as an independent company, with a little leverage provided by msystems’ IP.

[Edit- original text below]

The only way I see Samsung acquiring SanDisk is if they decide to spend the big big big bucks. $45 to $50/share ± would probably get the deal done. Somehow I can’t see Samsung going this high. They certainly won’t go this high unless forced to by a bidding war.

And a bidding war isn’t going to break out because the other potential deep-pocketed, most-motivated bidder, Toshiba, is happy with the status quo, and apparently doesn’t feel SanDisk will accept Samsung’s offer.

“Asked if Toshiba, the world’s No.2 maker of NAND flash memory chips after Samsung, would consider taking a stake in SanDisk or buying the company, Nishida said: “That’s not necessary.”

Nishida noted a meeting with SanDisk officials in the United States last week was part of a routine visit.”

In other words, the President of Toshiba just spoke face-to-face with SanDisk, likely Eli, about SanDisk’s intentions regarding the Samsung acquisition offer, signaling concern. After the meeting, Toshiba feels a competing offer isn’t “necessary.”

Samsung’s big problem is that SanDisk isn’t interested in being acquired on the cheap. To force the issue, Samsung (and like-minded institutional shareholders)  will have to bring enough pressure to bear to replace SanDisk’s board. A tall order.

Guess we’ll know by May 2009 at SanDisk’s annual meeting, but today it seems pretty clear that without a substantially higher offer, or a new board, SanDisk doesn’t have to do anything and likely won’t.


4 Responses to To Be or Not to Be?

  1. b9indifference says:

    Thanks Savo
    an excellent read as always
    The image gave me a much needed laugh!

  2. savolainen says:

    Hey b9,

    I kind of think Eli does a pretty good Hamlet. 😉

    I just finished putting up an edit of this post. I was wrong in my guess about a cash award, so I just took that out.

    As you are probably aware, DanR was kind enough to put up a copy of the arbitration ruling. The WSJ carried some comments today, so I added those as well. Here is the link to the ruling.

    It must really PO Samsung that they had msystems’ IP in hand for the life of the patents and then out of their own arrogance lost the IP. And on top of it, lost the IP to SanDisk and then to have this ruling come right in the middle of their acquisition efforts.

    Talk about snatching defeat from the jaws of victory.

    I wonder if msystems briefed Samsung on x4 prior to Dov’s x4 announcement? And if subsequently Samsung has been pursuing x4 counting on (hoping for) IP cover with a win in arbitration? (which they didn’t get)

    til later,

  3. b9indifference says:

    Hello Savo

    This link to Ars Technica was posted on the Investor Village board by “rdljllrdl ”
    The article supports your post and provides the perspective of the media and perhaps what is being said to the general investor. (I am bravely assuming a trading market and investors still exists).
    They focus on X3 & X4 nothing is said of 3D

    I share the text and link below as I thought the article would be interesting to the group here
    Many Thanks


    Samsung + X4: future of flash may hinge on SanDisk takeover
    By Ari Allyn-Feuer | Published: October 08, 2008 – 09:20PM CT
    SanDisk may have just concluded a multibillion-dollar patent licensing lawsuit with Samsung which could determine the future of both SanDisk and the flash industry at large. As SanDisk considers a $5.8 billion takeover offer by the flash giant, private arbitration has given Sandisk rights to a technology that may well hold the future of flash memory, the Wall Street Journal reported Monday.
    But first, a little technical background. Flash memory stores information in the voltage levels of floating gate transistors and is nonvolatile because those levels do not require power to maintain. Traditionally, digital information storage, including SRAM, DRAM, and early Flash, stored information by toggling each cell between two states; a neutral and a charged state; this is a single-level cell, or SLC, design. In what has heretofore been referred to as multi-level cell (MLC) flash, each cell has a neutral voltage and three levels of charged state, for a total of four states capable of storing two bits of information. While this scheme allows more data storage per transistor—and is hence much cheaper—reading more finely differentiated voltages requires finer measurement, which is in turn slower and more error-prone. It also reduces the usable life of the Flash thus produced. So SLC has been deemed superior in terms of performance and lifecycle, but MLC has been catching up and is currently dominating the rising SSD segment.

    The Samsung versus SanDisk story centers on technology patents from a small Israeli company called M-Systems. M-Systems released some of the first NAND flash drives for use in rugged industrial and military computers, the onboard systems for the Israeli Defense Force tanks and aircraft. A number of years ago, M-Systems invented techniques that allow even finer voltage level setting and measurement in NAND cells, allowing them to store three bits (eight levels) or even four bits (16 levels) per flash cell. Referred to as X3 and X4 technology, this technique holds the promise of reducing flash costs still further.
    Although the digital revolution is ultimately based on the accuracy and speed with which distinctions between only two voltage levels can be discerned, flash memory need not be as fast nor as durable as other forms of semiconductor products. In addition, the operating voltages of flash are much higher than those of DRAM, making more voltage levels feasible in each cell with the same voltage drop between levels. The cost advantages of current MLC technology are quite significant versus SLC, while its speed, longevity, and reliability difficulties are undergoing rapid improvement. As technology advances, it is reasonable to expect X4 technology to attain the same advantages over MLC that MLC now has over SLC. So X4 may well be the future path for the industry.
    The struggle over the future of flash
    M-Systems, a fabless company, agreed in 2003 to license the technology to Samsung in exchange for monetary royalty payments and good terms on which to purchase flash from Samsung. In 2006, the smaller firm accused Samsung of reneging on its supply agreements, and it withdrew from the arrangement. Scarcely three months later, SanDisk purchased M-Systems for $1.5 billion, gaining control of what now appears to be an essential body of technology.
    Now, the two firms are fighting a pair of legal battles. In addition to a well-known and preexisting fight over licensing fees in the hundreds of millions of dollars per year for technologies owned by SanDisk prior to its acquisition of M-Systems, SanDisk inherited the legal battle between M-Systems and Samsung. At stake is the nature of X4 licensing between the two companies. If Samsung can enforce its agreement with M-Systems on SanDisk, it will gain back X4 licensing on what are now very favorable terms, while if SanDisk can force renegotiation, it stands to make potentially billions in additional royalties.

    The matter was taken to arbitration between the two firms, and was decided in favor of SanDisk, with the arbitrators ruling that SanDisk’s M-Systems unit acted properly in withdrawing from the agreement. Samsung tried to take the matter to court in New York, but dropped the suit.
    In the mean time, Samsung decided to solve the problem by buying SanDisk. In May, the flash giant sent an unsolicited takeover offer to SanDisk, offering a “substantial premium” over SanDisk’s then-value of about $28 per share. After they lowered their offer to $26 per share, or $5.8 billion, SanDisk’s board unanimously rejected the offer, saying it undervalued their company. Samsung vowed to take the issue directly to shareholders in a hostile takeover.
    Now, the royalty income involved is a rhetorical football between the ombudsmen of the two companies in an ongoing struggle over Samsung’s bid for SanDisk. Samsung claims that SanDisk’s patent portfolio is adequately valued in its takeover bid, while SanDisk claims the larger firm is attempting to purchase its patent portfolio on the cheap to avoid paying heavy royalties. They say Samsung dropped its suit to avoid disclosure of the high value assigned SanDisk’s X4 patents. Shareholders’ acceptance of the buyout offer may hinge on the question of SanDisk’s X4 and other technology portfolio.
    If SanDisk retains control of its patents as an independent company, and if X4 is as important as it seems it may be, all the NAND manufacturers may be forced to pay billions of dollars to the now-beleaguered flash firm. If Samsung succeeds in its takeover attempt, it may end up with those licensing fees or gain a critical advantage in the NAND sector by refusing to license out X4. But whatever happens, the eventual result of this takeover attempt appears likely to have a broad influence on the future of NAND.

  4. Jacky says:

    Hi Savo, a very informative piece. Thank you. I just have a question regarding the licensing agreement between Samsung and msystem. Before you said Samsung developed oneNAND based on msystem’s ip. So you know if they’re still obligated to pay those licensing fees to msystem(Sandisk) now according to the arbritration ruling?

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