U.S. memory maker buyout by Chinese firm not likely to succeed

Micron headquarters

A reported buyout attempt by China's largest computer chip maker of U.S. based Micron Technology isn't likely to succeed, according to industry analysts.

Micron is one of the top five semiconductor makers in the world, and it has a lot to offer Tsinghua Unigroup, which has reportedly bid $23 billion for the Boise-based firm.

In a reply to Computerworld earlier today, Micron denied it has received any offer from Tsinghua.

Several analysts said The Wall Street Journal's report of a bid could likely be a "trial balloon." If real, however, the deal could become the largest Chinese takeover of a U.S. company on record.

"I think Micron can turn down/reject the offer unless it becomes very attractive," Fang Zhang, a memory analyst with market research firm IHS, said in an email reply to Computerworld.

Gregory Wong, an analyst with Forward Insights, said he's been aware of "rumors" of a Micron buyout for more than a month, and "not receiving a formal offer does not mean there have been no discussions."

What makes a potential deal even more interesting is that Intel has penned a deal for a 20% stake in Tsinghua, and Intel and Micron have also been involved in a close, long-term memory development partnership.

So, on the surface, a buyout of Micron would not likely affect any current or future partnerships with Intel.

As a result of its partnership with Micron, Intel gets half of the company's Utah fabrication plant's output sold it at cost. Intel, in turn, helps Micron design chips and develop new lithography processes.

What would Tsinghua Univgroup get from the deal?

It isn't surprising that a government-sponsored Chinese firm plans to enter the DRAM and NAND markets, considering the smartphone growth in China. While growth has slowed in recent quarters, China’s smartphone market is still the largest in the world, according to IDC. During the first quarter of this year, 98.8 million smartphones shipped in China, IDC said.

Jim Handy, an analyst with Objective Analysis in Los Gatos, Calif., however, is surprised that the company would plan to enter the market via an acquisition versus organic development.

"We have been telling our clients for the past few years that either China or India would create a new DRAM/NAND manufacturing company, especially since memory chip makers have enjoyed a long period of profits, and this usually motivates outsiders to invest in new DRAM makers," he wrote in an analysis.

"We have even heard that China's upcoming 5-year plan would include taking a 20% share of the memory chip business, which last year would have represented some $12 billion in revenues," he added.

Acquiring Micron would give Tsinghua Unigroup a major stake in the DRAM and NAND marketplace.

Micron "has a strong position in both NAND flash and DRAM sales, and has shown itself to be quite resilient during repeated market downturns that have cut DRAM supplier ranks from 28 companies in the middle-1990s to only 3 today," Handy added.

Micron is the world's second largest DRAM producer behind SK Hynix, and is the third largest NAND memory maker in a market led by Toshiba/SanDisk and Samsung, according to IHS.

Micron is also ranked third in terms of DRAM revenue (sales), behind Samsung and SK Hynix and third in terms of NAND flash revenue behind Samsung and Toshiba (SK Hynix comes in fourth).

A buyout of Micron would give China instant "self-sufficiency" in DRAM and NAND semiconductor production, IHS's Zhang said, a market the country has yet to break into with any significance.

Zhang added, however, said any such deal would not be easy and would require a long haul in convincing the U.S. government to okay it based on "security concerns."

Handy agreed.

"This kind of deal often must pass a lot of government scrutiny before it closes, and that could take several months," he said. "An exhaustive U.S. government review is very likely in this case."

What is Tsinghua Unigroup?

Tsinghua Unigroup is China's leader in fabless semiconductor manufacturing.

Handy referred to Tsinghua Unigroup as a "relatively puzzling company" that is managed by Tsinghua University in China. The university has posted a sparse outline of its work on the web.

"Unigroup itself has a Chinese-only website, which does have an "English" button that appears not to work," Handy wrote.

A subsidiary of Tsinghua Holdings Co., Ltd., Tshinghua Unigroup is, in fact, also funded by Tsinghua University. Last year, the chipmaker penned a series of development agreements with Intel Corp., which has also had a development partnership with Micron for more than seven years.

In its deal with Tsinghua, Intel agreed to invest about $1.5 billion for a minority stake of approximately 20% of the holding company under Tsinghua Unigroup, which will own Spreadtrum Communications and RDA Microelectronics. Both Spreadtrum and RDA are leading fabless semiconductor companies in China. The Intel/Tsinghua agreement is still on hold pending U.S. government approval.

At the time of the agreement, Intel CEO Brian Krzanich pointed to China as a huge market for smartphones and as having the largest number of Internet users in the world.

"These agreements with Tsinghua Unigroup underscore Intel's 29-year-long history of investing in and working in China," Krzanich stated. "This partnership will also enhance our ability to support a wider range of mobile customers in China and the rest of the world by more quickly delivering a broader portfolio of Intel architecture and communications technology solutions."

Micron is under no pressure to sell

According to Handy, Micron's management is bullish about its prospects for the remainder of the year, and they may decide that the reported offered price, which is 19% above today's closing price, is insufficient.

"Micron stock was trading in January at nearly twice today's value," Handy said.

As of January 2015, Micron's market capitalization was $32 billion.

Additionally, there has been a lot of concern recently that the Chinese economy may collapse, Handy said.

"If the [U.S.] government approval process takes too long, then a China bubble burst could well prevent this deal from materializing," he said.

Copyright © 2015 IDG Communications, Inc.

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