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Micron’s potential Elpida buyout comes with risk

Micron’s announcement that it is in negotiations to buy the Japanese DRAM memory giant Elpida could mean the company doubles its market share, but it also puts the company at higher risk during bust cycles, analysts say.

While the confirmation of negotiations broke Micron’s silence on its activities with Elpida, which filed bankruptcy earlier this year, Micron has not released any details of the negotiation or the bid process leading up to it.

Reuters reported that Micron led all interested parties with a $2.5 billion offer for Elpida, giving it exclusive rights to negotiate with the company. That figure has not been confirmed by any of the players involved in negotiations, however.

The rumors of an Elpida buyout have depressed Micron’s stock price to $6.21 as of May 14, cut in half from just a few months ago. But as a nervous market depresses the stock price, longer- term forecasts have tended to be more bullish.

“Theoretically, they are buying very cheap assets and are adding to the scale at cheap cost,” said Dave Petso, a Boise financial planner who keeps tabs on Micron.

The takeover would double Micron’s share of the DRAM market, which would mean much larger revenues during boom cycles with good chip pricing in the markets.

The problem is that the DRAM market has been in a bust cycle, with an overcrowded marketplace that has pushed prices low enough that Elpida could not survive until it turned around.

Jim Handy, a Micron analyst with the California-based Objective Analysis, said that is the dynamic making some stockholders nervous.

“If you have a smaller company that is losing some money and you turn it into a larger company that is losing a whole lot of money, that will usually make the stock price go down a bit,” Handy said.

Elpida has more than $5 billion in liabilities on its books, Reuters reported. Micron would have to shoulder some of its debt, but a buyout would likely result in debt restructuring that would allow Micron to escape from some of the companies debt.

Micron has just more than $2 billion in cash and easily liquidated investments and long term debt of about $2.2 billion.

Handy, along with other analysts, see increased memory chip pricing coming down the pipeline in the next year, which would mean a high payoff for Micron.

Petso said that the economics of the memory industry force companies to constantly expand production, even when the market is oversupplied, or risk falling behind competitors.

“You have to figure out how to expand production, even if you’re losing money like (Micron) are now,” Petso said. “They have got to get bigger. You simply can’t stay small and drive the prices down enough.”

Even so, Handy said, Micron isn’t in dire need of Elpida or any other companies. What it has is cash on the books that allows it to pick up a company like Elpida for cents on the dollar.

“What Micron does is take advantage of firesales, but they don’t need what the firesales have to offer,” Handy said.

Handy said he wouldn’t be surprised if Micron abandoned the negotiations altogether, but only if a better offer came up. He said they are likely still looking at Taiwanese memory giants and would go with whatever company caves to the lowest price in negotiations.

“They are in the cat bird’s seat,” he said.

For Boise, the negotiations indicate that Micron has made it “abundantly clear they are not building facilities in the United States,” Petso said.

The acquisition would make Boise more secure for Micron’s research and development operations, he said.

About Sean Olson

One comment

  1. Micron, or at least their HQ is not long for Boise.

    If you compare their stock multiple, and market capitalization relative to competitors, Micron investors are getting a serious raw deal as long as the company HQ remains in Idaho. I’ve followed the action here for quite a while: Wall Street hates the fact Micron is based in Idaho. If they moved anywhere else that looked promising, up-and-coming, etc….the stock would jump an immediate 25-30%.