Trick or Treat?

Was it for real?

Or was Samsung’s $5.85 billion offer simply another trick in the ongoing license and royalty re-sign wars?

We may never know. The offer is now off the table.

SanDisk’s board clearly had its doubts about Samsung’s sincerity:

“From the start of this process SanDisk’s Board has remained open to a transaction that recognizes SanDisk’s long-term value and contains the right protections for SanDisk’s shareholders. We repeatedly outlined a clear path to hold further discussions, including most recently in our letter on September 15, and Samsung consistently chose to ignore that path and, in fact, never contacted SanDisk regarding their proposal after we delivered our letter. We believe this raises questions about the real motivations behind Samsung’s offer.”

It appears that SanDisk consistently insisted on a a renewal of the Samsung IP patent cross-license as a pre-condition for in-depth acquisition negotiations.

“Because of this, we have proposed negotiating a replacement cross license and supply agreement, both of which would become effective in August 2009 if an announced transaction does not close. We have also requested that you commit to certain terms to ensure that a transaction has maximum certainty of closing. Despite our repeated requests Samsung has failed to address these legitimate concerns.”

Not only would a re-sign be a gesture of good faith, but it would have given SanDisk a bit of protection against IP theft. As part of its due diligence, Samsung would have wanted access to SanDisk’s secret and best stuff. Before providing such a guided tour, only the naive wouldn’t want at least a license in hand, should the deal fall apart at the eleventh hour.

I also thought it revealing that in the Q3 conference call, Eli said that there had been no communication between Samsung and SanDisk since September 15. If Samsung were really interested in a friendly acquisition, why not simply stay in touch?

Samsung still might have its way, but the more time that passes, the less likely a deal seems. Samsung appears to want SanDisk on the cheap. SanDisk appears dug in to hold out for perceived fair value.

A stand-off, but the clock is ticking– and time is on SanDisk’s side.  Toshiba’s $1 billion deal with SanDisk has thrown a wrench in Samsung’s plans. A billion dollars buys time.

Probably enough time to get through 2009. By mid 2009 SanDisk’s prospects should be improving. By year end, SanDisk might even be back in fashion, with a share price to match.

The big unknown is whether Samsung will blink in this stare-down, and sign the license renewal by August 2009. SanDisk appears to be preparing for vigorous litigation should there be no agreement- as well they should. Samsung will exploit any signs of weakness.

Litigation could take years and those will be years SanDisk will need to make do without Samsung’s royalty contributions.

SanDisk needs to tighten its belt and tighten it now. This appears to be the plan. Eli, from the Q3 cc:

“In addition to restructuring our supply commitments and reducing our capex, we are taking actions to lower our operating expenses. These actions will be implemented in the current quarter and will include canceling or exiting a number of product and marketing activities, and will result in employee reductions in R&D, sales & marketing, G&A and Operations. We will continue to invest in the areas that are most strategic for our future, including advanced NAND and 3D read/write development, mobile storage, SSD, and slotMusic.”

Personally I am far from convinced about slotMusic, but the rest makes eminent sense- sooner the better. Focus is a good thing.

Samsung’s prospects of escaping litigation royalty-free, look slim to me. I’m inclined to think Samsung will blink at the eleventh hour, just like last time around in 2002 and re-sign in August.

My take on Samsung’s bluster is that it just reflects how seriously Samsung takes SanDisk’s IP. Given no choice, Samsung seems likely to re-sign.

That said, Samsung may have yet another trick to play. Time will tell.

In hindsight its unbelievable how much Samsung lost by screwing over msystems. Samsung had perpetual license rights to msystems’ whole patent portfolio and then threw it all away just because they thought they could get away with stiffing a little guy.

What a great lever FLSH’s patent portfolio would be today in negotiations with SanDisk. Samsung would have perpetual rights to x4 et al. Now nada.

Its been said arrogance diminishes wisdom. This could be a case study.

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