Memory Makers Grapple with Falling Prices

Analysts look for opportunities as credit crisis squeezes the deal pipeline for memory chip makers.

HONG KONG -- A string of potential deals between memory chip makers underscores the desperate need to consolidate as the global financial crisis threatens to squeeze an industry already struggling with plummeting demand and falling prices.

But with most chip makers strapped for cash, and with credit markets drying up, the question is: Who has the money to buy whom?

Up to five major deals worth billions of dollars are currently on the table involving the biggest chipmakers from Japan, Taiwan and South Korea, bankers and analysts familiar with the deals say.

Japanese electronics conglomerate Toshiba Corp is in talks to buy U.S.-based memory chip maker Spansion, two industry sources with knowledge of the matter but who declined to be named, said this week.

Memory chips drive the functions of most tech devices, from mobile phones and laptops, to cameras and MP3 players. But as the global financial crisis depresses consumers, demand for gadgets, and therefore memory chips, is spiraling lower, sending chip prices below what they cost to make.

"It's like a perfect storm," said Peter Yu, an analyst at BNP Paribas.

"The industry is moving into a down cycle with over-capacity, and another double dip because of the global recession. If the situation continues as it is, I think we're likely to see over the next few quarters a lot of drastic corporate action."

In September, Korean consumer electronics giant Samsung announced a $5.85 billion, or $26 a share, offer for SanDisk, the largest U.S. retailer of flash memory cards.

But sources said SanDisk -- whose shares have fallen around 45 percent this year -- could be worth $34 to $36 a share if Samsung were to sweeten its offer to reflect the value of royalties it pays to the U.S. flash memory maker.

On Sept 25, shares of memory chip maker Micron Technology Inc rose 10 percent as investors speculated it could buy chip-making factories from Qimonda AG Loss-making Qimonda, whose parent company is Infineon Technologies AG of Germany, has declined to comment.

People with knowledge of the industry say other chip makers, including Hynix, ProMOS Technologies, Powerchip Semiconductor Corp, Elpida Memory Inc and Nanya Tech, could be involved in future deals.


The memory sector is ripe for consolidation because mainstream DRAM and NAND prices fell more than 30 percent since the beginning of the third quarter, "far outstripping memory maker's expectations," according to BNP Paribas.

Making matters worse is sluggish demand for gadgets such as cell phones which has made it nearly impossible to raise cash, crimping capital spending plans.

"Memory impacts so much of the tech world," said Credit Suisse's Jan Metzger, Director and co-head of Technology Coverage for the non-Japan Asia, Investment Banking Department.

"It's a capital intensive industry, where the leading players have historically frequently accessed capital markets."

With capital markets squeezed by the global credit crunch, much-needed cash could be nearly impossible to raise for the next few years.


Samsung, whose NAND flash memory chips own roughly 42 percent of the global market, said last week it is confident its bid for SanDisk will get regulatory clearance.

But given the glut of memory chips in the market right now -- a result of overproduction -- regulators could take the view that Samsung is trying to control the industry's chip-making capacity.

Still, some analysts believe deals are inevitable in the this dismal environment.

"People tend to hold on and maybe can get financing if there's the hope that things will get better," said Yu of BNP Paribas.

"We had that at the first of the year because of the supply-side adjustment. But then you have the global recession, and demand has dropped off. It looks like another dip, and it looks like it will be a very deep one, and not many companies can withstand a double dip, so the marginal guys will be pushed out."

Copyright 2008 Reuters. Click for restrictions.

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