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Micron 'fesses up: Yes, we plan to eat limping DRAMurai warrior

Signs 'definitive sponsor agreement to acquire and support Elpida'

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After months of speculation and rumours, Micron's acquisition of Elpida has finally been announced. The firm has now signalled its intention to buy Elpida for 200 billion yen ($2.5bn, £1.6bn).

Here's the Micron statement:

Micron … and Elpida Memory's … trustees announced today that the parties have signed a definitive sponsor agreement for Micron to acquire and support Elpida. The agreement has been entered into in connection with Elpida's corporate reorganisation proceedings conducted under the jurisdiction of the Tokyo District Court.

Micron will acquire 100 per cent of the equity of Elpida for 60 billion yen ($750m, £479) in cash. Elpida will become a Micron subsidiary. About 200 billion yen ($2.5bn, £1.6bn) will be used to pay off Elpida's secured and unsecured creditors. In addition, 140 billion yen ($1.75bn, £1.12bn) in future annual installment payments through 2019 will be paid from cash flow generated from Micron's payment for foundry services provided by Elpida. All pre-bankruptcy petition debt obligations of Elpida will be fully discharged and Micron will maintain Elpida's operations and employees.

Elpida has a subsidiary called Rexchip. Some 24 per cent of its shares are owned by Taiwanese Powerchip Technology and affiliates. Micron has agreed to buy these for about 10 billion new Taiwanese dollars ($334m), giving it about 89 per cent of Rexchip's shares. That adds up to $3.584bn cash going out from Micron when the bid closes plus another $1.75bn over the next seven years – $5.334bn in total.

For this vast sum Micron is getting:

  • Elpida's 300mm DRAM fab in Hiroshima, Japan;
  • Rexchip's 300mm DRAM fab in Taiwan; and
  • an assembly and test facility in Akita, Japan.

These fab assets can produce more than 200,000 300mm wafers/month, representing an approximate 50 per cent increase on Micron's current manufacturing capacity. Micron adds Elpida's Mobile DRAM capabilities to its existing networking and server DRAM strengths, and to its NOR and NAND flash facilities.

Jim Handy of Objective Analysis says Micron "will also increase its mobile DRAM share to about one quarter of the market, which would be a few percentage points ahead of Hynix and about half of Samsung's share."

Micron CEO Mark Durcan said: "We are creating the industry-leading pure-play memory company. Today's transactions will help strengthen the combined companies' market position in the memory industry through increased research and development and manufacturing scale; improved access to core memory market segments; and additional wafer capacity to balance among DRAM, NAND and NOR [products]."

It's generally hoped that DRAM suppler consolidation – like this deal – will stabilise prices and production levels. But analyst Handy disagrees: "There is no reason that a capital-intensive commodity that is supplied by more than one vendor should not undergo important price collapses any time there is an oversupply, since suppliers are highly motivated to run production capacity at its maximum output, and this forces them to lower prices to be able to find markets for overproduced chips.

"In brief, prices will continue to behave as they always have, even when the market had 23 suppliers."

The transactions are subject to approval by Elpida creditors, the Tokyo District Court, and other customary antitrust approvals. Elpida's reorganisation plan should be submitted to the Tokyo District Court for approval in August, with the overall transaction expected to close in the first half of 2013. Micron's purchase of the Powerchip group's Rexchip shares will occur upon close of the Elpida transaction.

Handy points out Micron's acquisition history has shown post-acquisition difficulties:

Micron has not been efficient at converting past acquisitions to its own processes, so Objective Analysis will watch to see if the Elpida change is any different. Micron acquired Toshiba's DRAM plants in Manassas, VA in 2002, ultimately shutting down the 200mm Toshiba line and converted everything to Micron's own process on 300mm wafers before gaining traction.

The later acquisition of Inotera from Qimonda in 2008 was plagued by low yields and output for an extended period that unfortunately coincided with an upturn in DRAMs, costing Micron perhaps $500m in profits.

Hopefully for Micron it will become a done deal and it can concentrate on honing its DRAM and NAND foundry technologies and giving rivals Samsung and Hynix a run for their money. ®

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