Micron Technology (NASDAQ:MU), which posted its Q3 2012 results last month, finally announced the acquisition of Elpida Memory for $2.5 billion after discussions with the company for over a month. With a strong presence in mobile DRAM, Elpida targets the mobile phone and tablet market, whereas Micron is the leader in enterprise DRAM solutions for networking and servers. By complementing its existing product portfolio, the acquisition of Elpida strengthens Micron’s position in the memory market.
We believe that the acquisition, by reducing the number of players, will further consolidate the DRAM market, improving the persistent oversupply situation and will bring about stability in market prices. The DRAM division accounts for over 50% of our price estimate of $7.47 for Micron and, by significantly increasing its market share, the acquisition will have a positive impact on the company’s valuation.
Micron In Unique Strategic & Financial Position To Go Ahead With The Acquisition
Elpida declared bankruptcy due to debts from declining prices, competitive pressure from Samsung (SSNLF) and lower demand on account of floods in Thailand. It filed a petition for the commencement of corporate reorganization proceedings with the Tokyo District Court in February 2012. The payments received from Micron will help Elpida fully discharge its pre-petition debt obligations.
Micron will be granted 100% equity of Elpida for $750 million, which is to be paid in cash at the closing of the transaction. Additionally, the company will pay $1.75 billion in future annual installments through 2019 from the cash flows generated from Micron’s payment for foundry services provided by Elpida, as its subsidiary. 
Elpida’s assets include a 65% ownership in Rexchip Electronic Corp. Apart from Elpida, Micron also agreed to buy Powerchip Technology Corporation’s 24% share in Rexchip for approximately $334 million. The fab assets acquired from Elpida and Rexchip will increase Micron’s current manufacturing capacity by almost 50%. 
With $2.6 billion in cash, we feel that the company is in a good financial position to complete both the acquisitions. Also, Micron’s sustainable core technological competence gives it a strategic advantage to leverage Elpida’s portfolio offerings.
Micron To Register Increase In DRAM Market Share Post The Acquisition
The acquisition will leave only three competitors in the global DRAM market – Samsumg, Hynix, and Micron. According to research firm IDC, Samsumg accounts for a majority share in the DRAM market followed by Hynix Semiconductor and Elpida.
In addition to getting a hold of Elpida’s market share, Micron will have the added advantage of supplying chips to Apple (NASDAQ:AAPL), which could further boost its market share. Recently, Apple placed a new order for DRAM chips with Elpida, cutting its reliance on rival Samsung for component supplies. Thus, the deal could make Micron the second biggest DRAM memory chips manufacturer, behind Samsung.
In our model, we estimate Micron’s share in the DRAM market to reach close to 13% by the end of our forecast period. However, this will significantly change post the acquisition, which is expected to close in the first half of 2013.
We are in the process of updating our price estimate for the Elpida acquisition.Notes: