Micron Awaits Twin Acquisitions

Zacks

Following Micron Technology Inc’s (MU) bid for Japanese chip maker Elpida Memory, the trustees have recently announced that both companies signed a definitive sponsor agreement for the proposed takeover.

The Tokyo District Court acted as the adjudicator of the agreement, related to Elpida's corporate reorganization proceedings.

As per the terms of the agreement, Micron will  pay 200 billion Yen, as reduced by reorganization expenses, to Elpida’s secured and unsecured creditors to satisfy their reorganization claims. Besides the reorganization settlement, Micron will be required to pay 60 billion Yen for the acquisition, translating to approximately $750 million.

This apart, Micron will also have to shell out 140 billion Yen (or $1.75 billion) in future annual installments through 2019 for foundry services provided by Elpida to Micron as its subsidiary. The financial support would thus result in the discharge of Elpida’s debtors, while supporting its operations and employees.

In a separate development, Micron signed an agreement to acquire a Taiwanese company, Powerchip Technology Corporation, and some of its affiliates, which will ensure the procurement of Powerchip’s 24.0% stake in Rexchip Electronics Corporation for approximately 10 billion Taiwanese dollars, or $334 million.

Sluggish growth in personal computer stemming from chip gluts in recent years have been triggered by sales and improvements in productivity, mainly owing to massive capital investment. This has resulted in lowering of chip prices closer to production costs. This has put immense pressure on SK Hynix's margins and led to a loss at the company.

On the other hand, improvement in demand for mobile devices such as tablet PCs and smartphones will drive DRAM sales and would cover up some of the weak PC industry demand.

Though Micron’s prospects in the mobile DRAM market look promising, it will not be easy to outpace Samsung, which commands a leadership position in this market. Recently, another research firm, TrendForce, revealed that mobile DRAM production capacity is increasing.

This apart, after this acquisition, around 90.0% of the worldwide chip industry will be controlled by three firms -- Samsung Electronics, Micron and SK Hynix -- which may help to stabilize the price fluctuation in this market.

Moreover, Gartner affirms that decelerating supply and increasing demand will lead to an improved scenario beginning in the second half of 2012 and through 2013.

Micron’s third quarter results were disappointing as net loss per share was wider than the Zacks Consensus Estimate. However, we remain positive about Micron’s pending Elpida buyout, which could drive higher DRAM market share. Also, Apple Inc.’s (AAPL) reliance on Elpida could be a big positive for Micron going forward.

Then again, we believe that it won’t be easy for Micron to capture share from SanDisk Corp. (SNDK), a key player in the NAND segment. However, the renewal of operations in Thailand may help the company in this respect.

Micron Technology has a Zacks #3 Rank, implying a short-term Hold rating.

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