Samsung's bid for SanDisk is off, and so are SanDisk shares

This morning, global #1 flash memory provider Samsung announced it is completely withdrawing its bid to acquire NAND flash card leader SanDisk, and even provided a parting insult on its way out the door.

"The decision to withdraw the proposal to acquire SanDisk Corporation at $26 per share was made in considerations of the growing uncertainties in SanDisk's business, its stand alone value, and the current difficult economic environment," reads Samsung's public statement of its decision reached late yesterday.

Not that a selloff wasn't already under way on Wall Street, but the market responded to Samsung's little commentary by punishing SanDisk severely. In the first 30 minutes of trading, its stock value on the NASDAQ had plummeted by 27%, to $10.60 per share -- about 40% of what Samsung had offered for the company. Samsung shares were trading flat in the same period.

Later yesterday evening, Samsung publicly revealed the contents of a letter sent by its CEO, Yoon Woo Lee, to SanDisk's board of directors. Here is the letter in its entirety:


October 22, 2008

Board of Directors
SanDisk Corporation
601 McCarthy Boulevard
Milpitas, CA 95035

Attention: Dr. Eli Harari, Chairman and Chief Executive Officer
Mr. Irwin Federman, Vice Chairman and Lead Independent Director

Dear Eli and Irwin:

After nearly six months of efforts to pursue a transaction with no meaningful progress, we are withdrawing our proposal to acquire SanDisk. I am disappointed that we have been unable to reach an agreement on our proposal. I continue to believe that a combination of our two companies would have created a superior global brand, an unparalleled technology platform and the scale and resources to drive convergence in the marketplace. Had we been able to execute on our proposal, your shareholders would have received full, fair and certain value for their shares and your employees and other stakeholders would have benefited from a broader platform and a wider range of opportunities.

Nevertheless, we have obligations to our own shareholders which require that we take a disciplined approach, particularly with respect to significant initiatives such as this. That disciplined approach requires that we squarely face the growing uncertainties in your business, which may continue to deteriorate in this difficult economic environment and further impact your standalone value. Your recently announced third quarter results serve only to illustrate this risk. Your surprise announcements of a quarter billion dollar operating loss, a hurried renegotiation of your relationship with Toshiba and major job losses across your organization all point to a considerable increase in your risk profile and a material deterioration in value, both on a stand-alone basis as well as to Samsung. As a result of these developments, we are no longer interested in acquiring SanDisk at $26/share.

While I regret that we were unable to work together to achieve a business combination that would have created new opportunities for all of us, we wish you the best in meeting the challenges ahead.

Sincerely,

Yoon Woo Lee
Vice Chairman & CEO
Samsung Electronics Co., Ltd.

The quarter-billion-dollar loss to which Yoon referred was reported by SanDisk only hours earlier, and confirmed by its quarterly earnings call yesterday afternoon: The company reported a loss of $155.2 million for the previous quarter, compared with black ink to the tune of $84.6 million for the third calendar quarter of 2007. Sales of its principal product declined more than 20% on an annual basis -- this in a market where demand is supposedly doubling.

But it's not that customers are suddenly rejecting SanDisk. As SanDisk CEO Eli Harari sees it, his company -- along with the rest of the industry -- should not have made huge investments in new fabrication facilities at a time when supply was already starting to grow faster than demand. Harari's comments yesterday (thanks to Seeking Alpha for the transcript) do not bode well for his company's partnership with Toshiba in a joint production facility, 30% of which was re-acquired by Toshiba on Monday.

"Our industry continues to experience excessive inventories, operating losses and weakening balance sheets, as a result of NAND fab investment decisions that were made well before the current global economic crisis," Harari said. "Recently, major NAND manufacturers announced shut-downs of 200 millimeter NAND wafer fabs and push outs of new 300-millimeter capacity. This is a positive step for bringing supply into balance with demand so that pricing can stabilize and so that profitability can return."

In a bulletin sent to BetaNews this morning, Objective Analysis analyst Jim Handy offered his opinion that Samsung's public withdrawal of its bid for SanDisk...could be the next positive step in its bid to acquire SanDisk. How else does one drive the price lower (for more, see "Microsoft + Yahoo")?

"Samsung's stockholders will be rewarded if the company can acquire SanDisk at the lowest possible price. Today's announcement should help Samsung push SanDisk's share price lower, making it possible to acquire the company at a better deal than the $26 per share that Samsung previously offered," Handy wrote.

"But, as we have told numerous reporters over the last few days, both companies' boards are acting in the best interests of their shareholders," he continued. "Samsung has a fiduciary duty to avoid renegotiating a very expensive royalty agreement that expires in August. If Samsung acquires SanDisk, not only will they avoid paying some $200 million a year in royalties, but they will also be able to collect $200-300 million in royalties from SanDisk's other licensees. On the other hand, SanDisk has the fiduciary duty of getting a price that accurately reflects not current market conditions, but the value of the company over the long term. The company has spent significant efforts and capital to garner a patent portfolio that gives it control of nearly every aspect of its markets over the long term, and these patents are very likely to be far more valuable in the future than they have been in the past."

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