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.
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.