Micron Technology (NASDAQ:MU) scored a victory against Elpida Memory’s bondholders last month as the Tokyo district court approved its proposal to acquire Elpida and dismissed an alternate plan promoted by a group of Elpida’s bondholders. Elpida’s restructuring plan is now pending approval from its creditors.
Aiming to increase its market share in the struggling DRAM market, Micron announced the acquisition of Elpida for $2.5 billion in July this year. However, the deal hit a roadblock the same month when Elpida’s bondholders resisted the deal, claiming that the $2.5 billion takeover bid by Micron undervalued the company’s assets. Later in August the bondholders submitted an alternate reconstruction plan to the Tokyo district court.
With Elpida on board, Micron is expected to overtake Hynix to become the second largest DRAM chips manufacturer behind market leader Samsung (SSNLF). 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 oversupply, which has put further downward pressure on the already declining DRAM prices.
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Elpida, a semiconductor DRAM memory manufacturer, declared bankruptcy due to debts from declining prices, increasing competition and lower demand on account of floods in Thailand. It filed a petition for commencement of corporate reorganization proceedings with the Tokyo District Court in February 2012.
Consolidation in the DRAM Market
Stuck in an oversupply glut, the industry has witnessed a continuous decline in DRAM prices over the years. Additionally, the persisting weakness in the PC market combined with soft macro conditions have suppressed demand for DRAM products leading to the current demand-supply gap in the DRAM market.
DRAM manufacturing is highly capital intensive, and as the technology nodes shrink, the costs of setting up a fabrication unit keep getting higher. The business is such that there is no customer loyalty or brand recognition, making it a tough market for smaller players to survive in. We feel that the consolidation will help reduce the number of players, making it a more rationale market and probably providing stability from a pricing standpoint, which we assume will steadily decline throughout our forecast period.
Potential Increase In Micron’s DRAM Market Share
The exit of Elpida leaves 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. Earlier in June this year, Apple placed a new order for DRAM chips with Elpida, cutting its reliance on rival Samsung for component supplies. Thus, getting Elpida on board 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 17% 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.
Our price estimate of $4.65 for Micron Technology is at a discount of over 10% to the current market price.