Is Micron Technology in Merger Talks?

Steven Appleton, Chairman and Chief Executive of Micron Technology, visited Taiwan last week for alleged merger talks with its DRAM manufacturing partners Nanya Technology and Inotera Memories in an attempt to win a share of Taipei bailout funds, according to an article in DigiTimes. The ongoing glut in memory chips combined with weakening demand is depressing DRAM prices and straining Micron's balance sheet, as reported in the company's first-quarter 2009 regulatory filing:

The semiconductor memory industry is experiencing a severe downturn due to a significant oversupply of products. The downturn has been exacerbated by global economic conditions, which have adversely affected demand for semiconductor memory products. Average selling prices per gigabit for the Company's DRAM and NAND Flash products for the first quarter of 2009 [ended December 4, 2008] decreased 34% and 24%, respectively, compared to the fourth quarter of 2008. Average selling prices per gigabit for the Company's DRAM and NAND Flash products in 2008 were down 51% compared to 2007. These declines significantly outpaced the long-term historical trend. As a result of these market conditions, the Company and other semiconductor memory manufacturers have reported negative gross margins and substantial losses in recent periods. In the first quarter of 2009, the Company reported a net loss $706 million after reporting a net loss of $1.6 billion for 2008.

Micron recorded aggregate inventory write-downs of $369 million for the first quarter of 2009 against $282 million in all of 2008 as a result of the significant decreases in average selling prices for its semiconductor memory products. Future charges could be larger than the amounts recorded in 2009 and 2008, too, if average selling prices for memory products remain depressed or decrease faster than the company can decrease its per gigabit costs, as they recently have.

As of December 4, Micron had one billion in cash on hand at quarter-end, but net free cash flow used was approximately $320 million. Although the company has contractual obligations (notes payable and capital lease obligations) totaling more than $3.2 billion, only $342 million and $487 million are due in 2009 and 2010. However, Micron could be on the hook for an additional $600 million in loan obligations should its 73 percent-owned TECH Semiconductor Singapore joint venture stumble and violate debt covenants.

Looking ahead, it is hard to imagine visibility improving. In the fourth-quarter of 2008, the PC industry suffered its worst shipment growth rate since 2002, as worldwide shipments totaled 78.1 million units, an anemic 1.1 percent increase from the fourth-quarter of 2007, according to results by IT consultant Gartner, Inc.

Falling selling prices for its products -- coupled with the need for an estimated $700 million to $750 million in capex spending for 2009 -- it is doubtful that Micron can survive in this environment as a stand-alone chipmaker. Micron might find its best financing alternatives rest in Taiwan.

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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