So far this year, there have been merger and acquisition activities across the semiconductor space. Continued rising costs and dwindling customer base are compelling companies to collaborate.
According to Bloomberg, flash memory storage vendor SanDisk Corp. SNDK is looking to sell itself. The company hired a bank to evaluate its strategic options. Following the news, SanDisk’s stock jumped 11.7% in after-hours trade yesterday.
Reportedly, Micron Technology MU and Western Digital Corp. WDC have expressed their interest in acquiring the memory chipmaker. However, none of the companies have confirmed the news. The discussions may not even lead to a transaction.
SanDisk is the largest supplier of NAND flash storage cards for data storage in a compact removable format. They are used in digital cameras, multimedia cellular phones, USB flash drives, gaming devices, laptop computers, personal computers, audio players and video players.
What’s Bothering SanDisk?
SanDisk derives the bulk of its revenues from the sale of SSDs, mainly used by PC manufacturers and in mobile devices.
According to Gartner’s latest predictions, mobile phone shipments are expected to increase 1.4% in 2015, much lower than its previous prediction of 3.3% growth. Furthermore, the anticipated growth rate is slower than the mobile phone market has witnessed over the past several years. Per the research firm, this is mainly due to the decline in the number of first-time buyers in China, indicating that the mobile phone market in the country might be approaching saturation.
Adding to its woes, in its Sep 2015 report, Gartner stated that PC shipments (including premium ultra-mobiles) are expected to fall 7.3% to 291 million units in 2015, primarily due to the lack of device replacement and a stronger dollar. This compared unfavorably with the July prediction of a 4.5% decline as a result of persistent slowdown in purchases in Western Europe, Russia and Japan due to local currency devaluation against the U.S. dollar.
We believe that the mobile device and PC shipment decline has affected part suppliers and allied industries as they mostly depend on PC sales and mobile sales for revenue generation. SanDisk is one of the companies to get affected from the current scenario.
To top it all, this CA-based chipmaker offered disappointing revenue guidance for the third quarter of between $1.35 billion–$1.45 billion with the mid-point of $1.4 billion missing the Zacks Consensus Estimate of $1.41 billion.
SanDisk in its second-quarter conference call revealed that a loss of one major customer (name being undisclosed) impacted its overall revenues and operating results.
Also, as SanDisk gets its chips from Toshiba, hence any appreciation in yen will have an impact on the company’s financial position.
Going further, the company is seeing increasing competition in both the traditional NAND and emerging SSD markets. Micron’s share in the NAND memory market increased with the acquisition of Japanese chip-maker, Elpida. Apart from Micron, SanDisk is expected to face stiff competition from two new entrants in the SSD market — Western Digital and Seagate Technology plc STX.
SanDisk expects the above-mentioned factors to continue to negatively impact its financial performance throughout the year.
The Acquisition Suitors
Micron is one of the leaders in the semiconductor industry and the biggest rival of SanDisk. On the other hand, Western Digital is one of the largest hard disk drive (HDD) producers in the U.S., and the acquisition will make it the world’s largest flash storage solution provider.
Last month, Western Digital announced that the Chinese government-backed Tsinghua Unigroup’s asset management arm, Unisplendour Corporation Limited (Unis), will buy newly issued shares at the rate of $92.50 or a total of $3.775 billion.
Also, since Western Digital makes traditional storage devices and needs to grow its SSD business fast, we believe that the transaction will provide it with significant liquidity to help it acquire SanDisk.
In fact, it would be the right time to take over SanDisk, as the shares of this flash drive maker have plunged about 36% so far this year.
How to Tap the Current Opportunity?
Investors could easily take advantage of the probable deal by employing merger arbitrage strategy to their portfolio. This strategy looks to tap the price differential (or spread) between the stock price of the target company after the public announcement of its proposed acquisition and the price offered by the acquirer to pay for the stocks of the target company.
Going long on the target or acquired company and short on the acquiring company could do the trick. If the deal materializes, shares of the target company will increase, generating profits for the investor.
Conclusion
We believe that an acquisition provides a smart exit for investors in this struggling chip company.
Currently, SanDisk has a Zacks Rank #3 (Hold).
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