The recently announced acquisition of Elpida Memory by Micron Technology (NASDAQ:MU), a leading manufacturer of dynamic random access memory (DRAM), has already hit a roadblock with Elpida’s bondholders rejecting the $2.5 billion takeover bid. The group of bondholders, which claim to represent Japanese and international pension funds, feel that Micron’s offer undervalues the company.
The bondholders plan to seek an approval to present a counter proposal to the Japanese district court, which they feel will provide a better value to Elpida’s creditors and shareholders. If they are able to secure the court’s approval, it will put immense pressure on Micron to reconsider its strategy to acquire the bankrupt company.
With around $2.7 billion in cash, we believe that Micron is in a good financial as well as strategic position to go ahead with the acquisition.
What Will Be the Estimated Opportunity Loss if the Deal Falls Through?
Micron ranked fourth in the DRAM market behind competitors Samsung (SSNLF), Hynix and Elpida. With the possible acquisition of Elpida, the company is expected to almost double its share (in terms of revenue) in the DRAM market. This could have possibly placed it in the second spot after Samsung.
Research firm IDC forecasts the global DRAM revenue to rise to $40 billion by 2016 from the current level of around $30 billion. With access to Elpida’s technology and plants, Micron will have the added potential to considerably increase its share in global DRAM revenues, significantly improving its future valuation.
Apart from the direct benefits to the company, we believe that Micron could also gain from the resultant consolidation in the DRAM market. The DRAM industry has been plagued with persistent over-supply which has further put downward pressure on the already declining DRAM prices.
Our current valuation of $7.47 for Micron is most sensitive to the average DRAM selling price per Gb and the stability in prices will positively impact our valuation. Assuming that the average DRAM selling prices drop to only $0.25 per Gb by 2018, instead of $0.18 per Gb that we currently estimate, there will be an over 20% upside to our current price estimate.
If the acquisition does not go through, Micron still might gain from the exit of Elpida from the DRAM market, but it will loose out on the opportunity to take over rival Hynix with the same.