Samsung and SanDisk: Q&A with Analyst Jim Handy

(MoneyWatch)  There's been lots of talk about SanDisk's rejection of Samsung's cash acquisition offer at double SanDisk's current stock price. We spoke to semiconductor analyst Jim Handy of Objective Analysis about the situation and some of the forces driving it.

BNET: Why did Samsung want SanDisk? Jim Handy: SanDisk has patents to cover almost every flash card, flash controllers, and some NAND memory technology. SanDisk was collecting hundreds of millions of dollars from Samsung. This is an opportunity for Samsung to get out from under that and to gain control of valuable intellectual property. They were in contract negotiations for the past 14 months.

I think that at any time, Samsung would have liked to buy SanDisk, but what's especially important about this time is that SanDisk stock is probably as low as it's every going to get, and the dollar is trading very unfavorably against foreign currencies, which means the price has an extra discount added to it.

BNET: Why wasn't SanDisk interested? JH: SanDisk is looking out for their shareholders. Their 52 week high was $56, and I fully expect by the end of 2009 for the stock to have exceeded that price. If they sell the company at the lowest price the stock has ever been, their shareholders are going to get screwed.

By using cash when the cash is cheap and buying the stock when the stock is lowest, that is the worst possible formula for shareholders for SanDisk because they don't get anything other than cash in hand, here and now. In order to accept those terms, an investor would have to be very short-sighted with their SanDisk stock. However, in today's market, it's really easy to be short-sighted.

In the stock deal Micron did with TI [to acquire the latter's DRAM business in 1998], it was one company's depressed stock buying another company's depressed stock. When the stock went up, everyone made out well. That would certainly be a more agreeable deal.

BNET: How strong is SanDisk in the long-term? Jim Handy: We're suffering today because of significant over investment in production capacity in 2006. Those investments take abut two years to turn into full production. By the middle of 2009, this market will turn around [as increased demand takes up the increased production].

SanDisk has a 40 percent share of most flash card business. It's all SanDisk brand. They have an extraordinary retail presence. We're going to be in a very profitable phase of the NAND flash business. Because they manufacture flash cards they're going to make money.

BNET: How important are their patents financially? Jim Handy: They like to say that it offsets their entire R&D expense. But their royalty stream is under 10 percent of their total revenues.

BNET: What happens next?

Jim Handy: The difficult thing right now is for SanDisk to keep their investors focused on the future of the company rather than the here and now. Samsung is making a compelling argument as to why investors should sell, that they're offering twice the price that it's going for right now. Also, Samsung is arguing that the luster has come off SanDisk and they'll never return to their former glory, which I don't believe.