SanDisk's board has unanimously rejected Samsung's unsolicited takeover proposal. The world's second-largest chipmaker had offerred to acquire the world's largest supplier of flash storage card products for $5.85 billion at $26 per share, a 66-per cent premium to the company's 30-day weighted average.
While rejcting Samsung's advnces, SanDisk said that the offer does not "reflect the intrinsic value of SanDisk's business" and referred to the 52-week high price of about $55 per share and said theoffer price was "opportunistic".
According to SanDisk, Samsung had initially indicated it would be willing to pay a "significant'' premium to the $28.75 per share closing price on 22 May 2008, when Samsung first approached SanDisk.
Samsung made a non-binding proposal dated 9 August 2008, to acquire SanDisk Corporation for $26 per share in cash, which SanDisk says is a 55 per cent discount to the 52-week high, as SanDisk's share price is currently close to its lowest in five years in view of the cyclical nature of the industry, the uncertainity over its unresolved patent cross license agreement renewal with Samsung and the "general equity market conditions".
''We believe Samsung's proposal does not provide appropriate value to our stockholders and is opportunistically timed at the trough of an industry-wide downturn," said Eli Harari, chairman of the board of SanDisk and chief executive officer said in a letter to Dr. Yoon Woo Lee, Samsung's vice chairman and CEO.
He said the offer did not reflect the value of the substantial synergies that Samsung can attain from an acquisition of SanDisk and asserted that nothing had materially changed since the date of offer in terms of the synergies Samsung could realise from acquiring SanDisk.
These, Harari said, include avoiding billions of dollars of royalties over the coming decade; gaining access to SanDisk's x3 (three bits per cell) and x4 (four bits per cell) knowhow; owning its advanced controller technology; owning all of the leading card formats; gaining control of SanDisk's "revolutionary" 3D (three dimensional rewritable semiconductor memory) technology, which he said was the best candidate to replace NAND flash in the coming decade along with owning the SanDisk brand, market share and retail distribution.
"We also note that the run rate of Samsung's royalties to SanDisk continues to grow," Harari said and added, "Our view remains that without the right to use SanDisk's patents, Samsung's stand-alone NAND business' prospects would be significantly compromised.
"Conversely, ownership of our fundamental patent portfolio would greatly strengthen your patent position in emerging markets for flash storage like SSDs and managed NAND chipsets. We hope that your current offer is not an attempt to capitalise on the uncertainty reflected in our share price while this IP issue remains unresolved or a negotiating tactic in the licensing negotiations.
The South Korea-based Samsung insists that SanDisk's business and value had changed drastically which reflects in its own disappointing results and the overall condition of the world's economy has deteriorated considerably with markets becoming more turbulent and global economic trends are in the negative.
"This offer is full and fair," Samsung's Dr Yoon Woo Lee said in a addressed to Harari and SanDisk's vice chairman and lead independent director Irwin Federman.
"The world has changed dramatically in the past 52 weeks as can be seen from SanDisk's own disappointing results," he said referring to SanDisk's offer comparison to its 52-week high share price.
The said consumer spending and the overall economic situation had been getting worse and it would take the NAND flash market "quite a bit of time to recover."
"Notwithstanding the current market conditions, to stay competitive, SanDisk will need to fund critical investment and development over the next several months - cost cutting alone will not suffice," said Dr Yoon, adding, "Our offer insulates your shareholders from the risk of market conditions that have severely deteriorated and are expected to remain challenging."
He also refuted SanDisk's assertion that Samsung's offer was a negotiaiting ploy to settle the patent liccense issue between the two companies saying, "Despite our substantial efforts on the IP front, you have agreed to schedule only two meetings since July and during those meetings you have been unwilling to engage with us on any productive proposals that adequately recognize the changed market dynamics in your markets and the decline in value of your patent portfolio in the period since the IP license was last renewed."
The price of mainstream NAND flash memory chips has plunged 80 per cent since the third quarter of last year due to oversupply all year. A new factory built by Samsung's rival Hynix in Cheongju, South Korea, dubbed Fab M11, will produce chips on 40,000 silicon wafers per month starting from this month, adding to over supply.
Samsung Electronics is also building more production lines to beat its Hynix in the NAND flash segment.
NAND makers like Samsung, Hynix and Toshiba are expanding in a big way this year despite the price slump to raise market share, which Samsung has already begun.
Analysts say that Samsung could buy SanDisk shares from institutional investors at the $26 offer price, and build a minotiry stake of around 20 to 30 per cent to put more pressure on SanDisk, and theafter work to raise its stake. SanDisk's shares have lost much value since late last year, with the NAND flash drive market suffering a downturn.
That is the reason some institutional investors would want to sell out to Samsung and exit the market, and analysts say that it is not entirely impossible that Samsung has already made some kind of arrangements with these investors before coming up with the $26 offer.