Micron Technology (NASDAQ:MU), the only major U.S.-based manufacturer of memory products, closed its acquisition of Elpida Memory last weak. Elpida, a semiconductor DRAM memory manufacturer, declared bankruptcy in February 2012 due to mounting debts from declining prices, competitive pressure from Samsung (SSNLF) and lower demand on account of floods in Thailand.
In addition to acquiring 100% of Elpida’s equity, Micron also gained control of 24% share of Rexchip Electronics Corp. from Powerchip Technology and some of its affiliates. Elpida’s assets include a 200 mm DRAM fabrication facility in Japan, approximately 65% ownership interest in Rexchip and a 100% ownership interest in Akita Elpida Memory. Together with Rexchip shares acquired from Powerchip, Micron now controls approximately 89% of Rexchip’s outstanding shares and 100% of its product supply.
Micron and Elpida entered into a sponsor agreement in July last year, but the deal was delayed as it hit a number of roadblocks starting with Elpida bondholders resisting the acquisition in July 2012, claiming that the takeover bid undervalued the company’s assets. However, the Tokyo district court rejected the alternate reconstruction plan submitted by Elpida’s bondholders in November 2012.
With the acquisition of Elpida, Micron aims to not only enhance its R&D and manufacturing scale but also gain from significant cost and production synergies and a stronger memory product portfolio. Below we discuss why the acquisition will help Micron gain a stronger foothold in the DRAM market.
Micron To Become The Second Largest DRAM Player
Samsung and SK Hynix were the top two players in the DRAM market with shares of 37% and 26%, respectively.  However, as per research firm IDC, Micron and Elpida together will now account for 28% of the market, making Micron the second largest DRAM player behind Samsung.
Micron’s Manufacturing Capacity To Increase By 45%
The manufacturing assets of Elpida and Rexchip together can produce more than 185,000 300mm wafers per month. The fab assets acquired from Elpida and Rexchip will increase Micron’s current manufacturing capacity by approximately 45%. ((Micron and Elpida Announce Closing of Sponsor Agreement Transactions, Micron Press Release, July 31, 2013)) Micron currently has two fabs dedicated to DRAM production, but with Elpida’s acquisition the number of fabs will double. Additionally, the company has the flexibility to shift production capacity between NAND and DRAM products, enabling it to take advantage of changing market conditions.
The memory market is expected to increase its installed capacity by 8.2% by the end of 2013.  In 2012, Micron was at fifth position in terms of installed capacity, but with increased production capacity, it is expected to have the second largest installed capacity by the end of this year. A bigger scale will better equip Micron to service large customers.
Source: IC Insights
Strong Presence In Mobile DRAM
With the slowdown in PC shipments, the growing demand for smartphones and tablets is expected to drive demand for memory products. During Q2 2012, the share of PCs in global DRAM shipments declined below 50% for the first time since 1980.  On the contrary, mobile DRAM’s market share in total DRAM shipments has been rising. The combined share of mobile handsets and tablets in the DRAM market is estimated to reach 26.7% by the end of 2013, almost double from 14.1% in Q1 2012. 
Though Micron is the leader in enterprise DRAM solutions for networking and servers, it currently generates less than 10% of its revenue from mobile DRAM. Elpida on the other hand has a strong presence in mobile DRAM and targets mobile phones as well as tablets. Elpida’s portfolio offers characteristics such as high-density, high-speed, low power and small packaging profiles, which are important for mobile devices.
Sourcing chips for iPhone and iPad for quite some time, Elpida is Apple’s key supplier. Apple uses 80% of Elpida’s mobile DRAM production capacity which is currently supplying SDRAM for Apple iPhone 5.  In June 2012, Apple placed a new order for DRAM chips with Elpida cutting its reliance on rival Samsung for component supplies. Additionally, Elpida recently supplied memory products for Google’s second generation Nexus 7 tablet. 
Elpida currently has 1,000 patents in its portfolio. If Micron is able to better leverage Elpida’s patent portfolio, it can increase its business with Apple and other players, significantly accelerating its growth rate in the future.
We will update our price estimate of $13.68 for Micron Technology to account for Elpida’s acquisition after its next earnings release.Notes:
- Micron Seeks Profit Even in Worst of Times With Elpida Deal, Bloomberg, July 31, 2013 [↩]
- Acquisition Of Elpida Memory Inc. By Micron Technology, Seeking Alpha, April 2, 2013 [↩]
- Sign of the Times: PC Share of DRAM Market Dips Below 50 Percent for First Time, iSuppli, September 14, 2012 [↩] [↩]
- DRAM, NAND Flash prices rising amid supply shortage, Focus Taiwan, June 3, 2013 [↩]
- Micron closes $2 billion acquisition of memory maker Elpida, Tech Spot, August 1, 2013 [↩]