Last month, Micron Technology (NASDAQ:MU) received antitrust clearance from the Chinese Ministry of Commerce for acquiring Elpida Memory. It had already taken a pre-merger approval from the United States, Czech Republic, Japan, South Korea, Singapore and Taiwan – the Chinese approval was the last clearance required for completing the acquisition. After the Chinese approval, the Tokyo district court issued an order approving Elpida’s reorganization plan. Subject to the waiver of certain conditions, Micron expects the transaction to complete in the first half of 2013.
Micron announced its acquisition of Elpida for $2.5 billion in July 2012. However, the deal hit a roadblock the same month when Elpida’s bondholders resisted the deal claiming that the takeover bid undervalued the company’s assets. The Tokyo district court rejected the alternate reconstruction plan submitted by Elpida’s bondholders in November 2012.
With Elpida’s acquisition, Micron is expected to overtake Hynix to become the second largest DRAM chips manufacturer behind market leader Samsung (SSNLF). 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 DRAM market share. In June 2012, Apple placed a new order for DRAM chips with Elpida cutting its reliance on rival Samsung for component supplies.
Additionally, mobile devices are anticipated to account for a rising proportion of DRAM shipments in the future. Micron currently generates less than 10% of its revenue from mobile DRAM, but with Elpida on board, the proportion could significantly increase as the latter has a strong presence in the mobile DRAM market.
Growth In Mobile Will Fuel DRAM Shipments
The DRAM industry has been plagued with persistent oversupply, which combined with soft demand put pressure on the already declining DRAM prices. However, the ongoing consolidation in the memory market has taken some excess capacity off the market. The shifting industry capacity away from PCs to higher growth segments such as mobile and servers is another favorable trend which would drive future demand for memory products.
For over three decades PCs have accounted for more than 50% of the DRAM market. However, during Q2 2012, PCs share in global DRAM shipments stood at 49%, the first time since 1980 when it did not consume the majority of DRAM memory products.  On the contrary, the market share of mobile DRAM to total DRAM shipments increased from 7.9% in Q1 2012 to 17.8% in Q2 2012. 
We believe that with Elpida’s acquisition Micron will be in a stronger position to leverage this trend.
DRAM Prices Could Benefit From The Consolidation
Stuck in an oversupply glut, the industry has witnessed a continuous decline in DRAM prices over the years.
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. Elpida’s exit has left only three major players in the DRAM market – Samsung, Micron and Hynix – and we feel the consolidation will bring some rationality to the DRAM market providing stability from a pricing standpoint, which we assume will steadily decline throughout our forecast period.
Our price estimate of $6.53 for Micron Technology is at a 20% discount to the current market price.Notes:
- Sign of the Times: PC Share of DRAM Market Dips Below 50 Percent for First Time, iSuppli, September 14, 2012 [↩]
- Mobile DRAM Revenue Hits Record High in Q2, iSuppli, October 17, 2012 [↩]