Every day seems to bring a new twist to the SanDisk (potential-acquisition) saga. Friday’s news was that Toshiba may buy about half of the equipment SanDisk owns in a joint venture memory chip plant for a cool billion- and that’s dollars.
This could be read two ways. Either Samsung is about to acquire SanDisk and Toshiba wants to insulate itself from Samsung – or – Toshiba is lending its buddy SanDisk enough money to forge forward as an independent company.
When the Toshiba-could-buy-SanDisk’s-equipment news hit around 1:00 PM, SanDisk was green. Following the news, SanDisk promptly sold off, ending the day at the low- down 6%.
Mr. Market seems to think the news is a negative for Samsung’s acquisition offer. I’m inclined to agree.
A billion dollars is real money.
If Samsung had been counting on SanDisk’s not having the resources to play an extended game of IP legal hardball, they’re in trouble now. A billion dollars is about 3 years of lost Samsung royalties. 3 years is probably more than enough time to hang Samsung out-to-dry in court.
If Samsung had been counting on SanDisk not having the capital needed to stay competitive, they’re out of luck there too.
If Samsung had been counting on a weak SanDisk balance sheet to scare off institutional investors, they might need to come up with a new scare tactic.
Toshiba has no interest in seeing SanDisk swallowed by Samsung, its arch-rival. Many have rightly seen Toshiba as a potential White Knight riding to SanDisk’s rescue. While it may yet come to a counter-bid, an equipment buying deal would seem a far more economical scheme to keep SanDisk’s IP out of Samsung’s clutches.
Won vs Yen
Much has been made in the press about Samsung’s deep pockets. Far less attention has been paid to the currency crisis in South Korea.
Year-to-date, the U.S. dollar has strengthened 42% against the South Korean Won. The Won is at a 44 month low against the greenback. Not such great news for a Won-based company pursuing an acquisition offer in U.S. dollars.
Samsung plans to fund its SanDisk acquisition with internal cash and available financing. That internal cash (Won) would have gone a lot further before the Won’s recent precipitous slide.
Given the current Korean financial crisis, available financing from Korean sources is likely hard to come by. In fact last, week Korean press reported that Samsung would be raising $2 billion abroad to acquire SanDisk rather than placing corporate bonds.
On the other hand, the Japanese Yen is up 9% against the U.S. dollar since the beginning of the year.
Even with currency considerations, I don’t doubt that Samsung has the ability to come up with $5.8 billion dollars ($26/share) one way or another.
Whether Samsung also has the flexibility of sweetening its bid significantly is another matter. I also wonder whether Samsung wants to commit the extra resources that might be required for a protracted hostile takeover attempt.
SanDisk isn’t going to be easy pickings. Shark repellant, takeover defenses, seem to be in place.
According to SanDisk’s SEC filings, SanDisk has a number of defenses which could discourage a takeover attempt. These include a stockholders’ rights plan which could trigger substantial dilution in turn increasing the cost to be paid. In addition, SanDisk’s board has been granted authority to issue additional shares with fixed rights, preferences and privileges.
From SanDisk’s latest 10Q filed 8/11/2008:
“Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law could discourage or delay a change in control and, as a result, negatively impact our stockholders. We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have a stockholders’ rights plan that would cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our board of directors. This could discourage an acquisition of us. In addition, our certificate of incorporation grants our board of directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock without stockholder action (2,000,000 of which have already been reserved under our stockholder rights plan). Issuing preferred stock could have the effect of making it more difficult and less attractive for a third party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to our common stock that could have a material adverse effect on the market value of our common stock. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. This section provides that a corporation may not engage in any business combination with any interested stockholder during the three-year period following the time that a stockholder became an interested stockholder. This provision could have the effect of delaying or discouraging a change of control of SanDisk.”
I was going to add a section here on Toshiba as a full blown white knight, but that’s going to have to wait. Once again I’m running short of time. Suffice it to say that if required, I expect Toshiba will step in to block a Samsung acquisition of SanDisk. Too much is at stake for Japan Inc to cede critical IP in solid state storage to the Koreans.
My favorite Toshiba-as-White-Knight scenario includes other big-name Japanese companies who would stand to profit from a piece of the action.
All this being said, I acknowledge that my crystal ball is cloudy. While I still feel that in all likelihood SanDisk will emerge from this downturn as an independent company, I’m prepared to be surprised. Respected friends don’t share my views.
One points out that Samsung officers were seen recently in SanDisk offices in Kfar-Saba. Due diligence or something else?
Another points out that SanDisk’s largest shareholders are the same as Yahoo’s. Hypothesis being that these folks are not going to put up with deja vu all over again.
Paraphrasing that old Chinese curse, these are interesting times for SanDisk.
Tomorrow along with miserable earnings, I don’t expect much in the way of news. “No comment” will be the likely refrain. No comment on acquisition talks with Samsung. No comment on license renewal talks with Samsung. No comment on the potential equipment deal with Toshiba.
[Edit 20 October 2008: The Toshiba equipment deal was announced this morning, so there should be plenty of detail in the cc.]
It should be interesting to hear what SanDisk has to say (if anything) about x4 and MDOC IP in light of SanDisk’s arbitration win over Samsung.
In any case, my hope is that top line growth is healthy and inventory overhang is under control.