September 18, 2008

Samsung’s Cash Bid Rebuffed By SanDisk

By Brad Stone

Vindu Goel contributed reporting from New York.


Samsung Electronics has made an unsolicited $5.85 billion cash offer for SanDisk, a Silicon Valley maker of flash memory cards that are critical components of popular devices like MP3 music players and digital cameras.

In a proposal first made in August and revealed to investors after the U.S. markets closed Tuesday, Samsung of South Korea offered to pay $26 a share for SanDisk, more than 90 percent above its closing price of $15.04. SanDisk shares shot up nearly 50 percent to almost $23 in after-hours trading as investors reacted to the unsolicited bid.

SanDisk's founder and chief executive, Eli Harari, rejected the proposal in a letter made public Tuesday, saying that Samsung was significantly undervaluing the 20-year-old company. "We believe Samsung's proposal does not provide appropriate value to our stockholders and is opportunistically timed at the trough of an industrywide downturn," Harari wrote.

The public fracas called to mind another highly publicized technology drama this year, between Microsoft and Yahoo. Like Microsoft, Samsung made its acquisition bid public only after what it says were months of private and unproductive discussions between the companies.

There is also a similar debate over the value of the company. SanDisk's stock has lost more than half its value over the past year as the $14 billion-a-year flash memory market suffers from a glut of inventory and becomes increasingly dominated by two large players: Samsung and its Japanese rival, Toshiba.

SanDisk, however, has something that Samsung needs: intellectual property. Harari, a former Intel engineer, recognized the value of patents early on. The company has about 860 patents in the United States and 550 overseas. Samsung pays SanDisk $440 million a year to license those patents.

The companies were in negotiations to renew the agreement, which expires next August. SanDisk has complained that the uncertainty over that deal depressed its stock price, which Samsung is now exploiting.

One option for SanDisk is to find another company to swoop in with a better offer. But one potential buyer that had been thought to be interested - Seagate Technology, a leading maker of computer hard drives and a former investor in SanDisk - said it was not.

William Watkins, Seagate's chief executive, said in an interview that the flash market was unattractive because South Korean companies like Samsung benefited from government policies that gave them access to inexpensive capital in a business that requires huge investments. Watkins said Harari was a friend, but "Seagate can't come in and save SanDisk."

Originally published by The New York Times Media Group.

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