Samsung Pursuing Reluctant SanDisk

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Seoul, Korea — San Disk rebuffed an unsolicited merger proposal by Samsung Electronics, but the Samsung board is intent on pursuing a cash deal to purchase the publicly held flash-memory maker for $26 per share, or $5.8 billion.

For its part, SanDisk said it’s open to further negotiations.

In a letter to Samsung’s board, the SanDisk board said it “is open-minded about a transaction with Samsung if it represents a price that recognizes the long-term intrinsic value of SanDisk and the significant synergies that accrue to Samsung, provides deal certainty to SanDisk, and can be conducted in a process that adequately protects the interests of SanDisk's stockholders.” The current proposal, however, “falls well short on all counts,” the letter said.

In the letter, SanDisk’s board also called the buyout proposal “an opportunistic attempt to take advantage of SanDisk's current stock price, which is significantly depressed given industry cyclicality, the uncertainty resulting from the unresolved patent cross-license agreement renewal [expiring in 2009] with Samsung, and general equity market conditions.” The proposal, the letter noted, could be a “calculated negotiating ploy or an attempt to gain leverage in the ongoing licensing negotiations between the companies.”

SanDisk’s stock price is near a five-year low, analysts said. On Tuesday, the stock closed at $15.04.

Samsung responded to the rebuff with its own letter to SanDisk’s board, underscoring its intent to pursue the deal. “While it has been and remains our strong preference to continue to work with you to reach a binding merger agreement in a cooperative and expeditious fashion, we have become increasingly concerned that the lack of progress is not serving the interests of either company’s shareholders,” the letter stated. Samsung, also a major flash-memory maker, contended the “combined company would be well positioned to accelerate the adoption of flash-memory technology in new markets.”

In its letter, Samsung’s board contended SanDisk faces severe challenges in remaining competitive as a stand-alone company. Because “markets have become more turbulent and global economic trends are negative,” Samsung claimed, SanDisk likely won’t have the resources it needs to remain competitive. “Separately investing in necessary state of the art facilities will be a significant tax on your business in the near term,” Samsung told SanDisk. “In addition, reliance on IP and enforcing it is a costly and uncertain business for both our companies. Faced with these challenges, now is the time to merge.”

Expanding on SanDisk’s challenges, Samsung claimed, “It will take the NAND flash market quite a bit of time to recover,” and it said that to stay competitive, SanDisk “will need to fund critical investment and development over the next several months — cost cutting alone will not suffice.” The Samsung offer “insulates your shareholders from the risk of market conditions that have severely deteriorated and are expected to remain challenging.”

Samsung also called the business logic of its proposal “compelling,” saying a combined Samsung-SanDisk would have “a superior global brand, an unparalleled technology platform and the scale and resources to drive convergence in the marketplace.”

“SanDisk would bring “its innovative culture and technology leadership,” and Samsung would bring its “scale, leadership in manufacturing and execution, and strong systems and consumer electronics segment knowledge.” As a result, the combined company “would be well positioned to accelerate the adoption of flash-memory technology in new markets.” In addition, Samsung said, the two could “establish the platforms and capabilities necessary to position flash as the preferred vehicle for delivery and storage of a wide variety of content, such as film, in a way that would not be possible for either of our companies alone.”

Samsung said it would operate SanDisk as a separate subsidiary “to maintain the environment that has contributed to your success.” Samsung also has no plans to cut SanDisk jobs, the letter said.

For its part, SanDisk also cited uncertainty that the merger of the two flash-memory giants will pass regulatory muster and does not provide protection to SanDisk's stockholders if a transaction doesn’t close.

Separately, SanDisk chairman Eli Harari said in a statement that the proposal “does not provide appropriate value to our stockholders and is opportunistically timed at the trough of an industrywide downturn.” The proposal “fails to recognize the value of our patent portfolio, in particular to Samsung, our significant investments in our strategic partnerships, and our technology leadership in 3 and 4 bits per cell flash memory, advanced controllers and three-dimensional (3D) semiconductor memory.”

Irwin Federman, vice chairman of SanDisk, said, "We have been and remain willing to enter into good-faith discussions with Samsung. However, due to Samsung's unwillingness to meet fair and reasonable process conditions coupled with their desire to acquire SanDisk at a significant discount to our view of its intrinsic value, the board believes that this proposal is not in the best interests of stockholders.”


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