by Anton Shilov
07/25/2012 | 12:54 PM
Micron Technology’s plan to purchase of bankrupt Japanese entity Elpida Memory is a bold move not without risk, even though Micron will emerge from the acquisition considerably larger with more than double its original manufacturing capacity for dynamic random access memory (DRAM), according to an IHS iSuppli information and analysis firm.
Micron’s ongoing buyout of Elpida is expected to boost the Idaho firm’s DRAM production volume to approximately 370 thousand wafer starts per month over the long term, up 131% from 160 thousand wafer starts prior to the purchase. The new-found capacity by the only U.S. memory manufacturer allows it to leapfrog perennial second-placed Hynix Semiconductor, which now will become the third-ranked player in the global DRAM industry, with about 300 thousand wafer starts per month.
Both Hynix and Micron will continue to trail DRAM market leader Samsung Electronics, which leads with 400 thousand wafer starts per month. Based on Q1 2012 rankings, the Micron acquisition will boost its standing to 24.8% share of the DRAM space, behind Samsung’s 40.8% portion, but ahead of Hynix’s 24.2% share of market.
Not everything is that easy: the first quarter of the year was not bad for Elpida if only DRAM sales are considered. Therefore, Micron has to be very careful integrating Elpida as usually market share of a merged company is lower than the combined share of two separate firms.
“Several key components make the Micron-Elpida deal appear to be a smart move, but integration could prove challenging or even messy if details are not worked out carefully enough. Micron’s previous acquisitions in years past of specialty memory makers Numonyx and Inotera presented unanticipated surprises, and in some ways Micron is still digesting those purchases,” said Mike Howard, senior principal analyst for DRAM and memory at IHS.
Moreover, the transfer of technology entailed by the deal with Elpida - a competitor on roughly the same scale as Micron - may prove costly and time consuming.
“All this means that while Micron has put a tremendous amount of work into the acquisition, the real work lies ahead, IHS believes,” added Mr. Howard.
Among the intriguing facets of the Elpida deal are the purchase price of the transaction, the way payments will be made and how the payments will be funded.
In terms of the price, the total purchase cost of Elpida to Micron is $2.5 billion, of which $750.0 million is to be paid in cash. The cash portion of the payment is intended for Elpida assets and will be due at the close of the deal, expected sometime in 2013. The cash payment will not necessarily reduce the cash balance of Micron, as it will gain access to all of Elpida’s cash and current assets on the bankrupt company’s balance sheet. Elpida at the end of December 2011 had approximately $1.4 billion in assets.
The other part of the purchase price is the remaining balance of $1.75 billion. This part of the payment, which does not start until December 2014 and will continue to 2019, is paid out in interest-free installments - a terrific boon to Micron, considering that interest payments could have easily approached 5%.
Lastly, of keen interest to DRAM market watchers and prognosticators is that the deal also calls for the payments to come from the free cash flow of a restructured Elpida, which will now turn into a Micron subsidiary. If Elpida is not cash-flow positive in its new role as Micron offspring, then no payments will have to be made by the parent company. By structuring the deal this way, Micron has insulated itself from any drastic downturns in the DRAM market or from being upended by larger macroeconomic events beyond its control.
In a separate but related deal, Micron also purchased Taiwanese maker Powerchip Semiconductor’s minority interest in Rexchip Electronics, in which Elpida had majority two-thirds share. The deal for $330 million gives Micron an overwhelming 89% ownership share of Rexchip, which has a cost competitive, leading-edge manufacturing plant in Taiwan. The Rexchip facility formed a very attractive component of the entire Elpida deal, and Micron’s concurrent purchase of both Elpida and Rexchip gives the U.S. memory maker an even stronger edge in the tightly held DRAM space.