Micron’s Elpida acquisition: Analysts weigh in

July 7, 2012 — With Micron Technology Inc. (Nasdaq:MU) acquiring bankrupt DRAM maker Elpida Memory Inc.’s assets for 200 billion Yen (approximately US$2.5 billion), several analysts are looking at the move and how it affects the DRAM manufacturing landscape, as well as the Flash memory sector.

Micron will pay $2.5 billion for Micron and its 65% stake in Rexchip, and put up an additional $334 million for Powerchip Technology Corporation’s 24% stake in Rexchip. The deal should close in H1 2013. Get the specifics of the Micron/Elpida deal here.

Micron says the additional assets will make it the "leading pure-play memory manufacturer." Barclays Capital notes that the assets approximately double Micron’s wafer capacity. Micron expects to grow to 21% market share in memory semiconductors, overtaking Hynix (16%) and drawing closer to #1 Samsung (34%), estimates Objective Analysis’ Jim Handy and Lane Mason. Micron stresses that the company will not compete with its customers, unlike Samsung. IHS iSuppli analysts see the Micron’s share growing to more like 24.8%, and places Samsung at 40.8%, and Hynix at 24.2%.

The deal was appealing to DRAM market watchers, who hoped that the combination of Micron and Elpida would create an oligopoly, keeping prices stable, but the analysts at Objective Analysis disagree. While the list of DRAM makers grows ever shorter, the commodity nature of the market will continue as before, with no changes, says Objective Analysis. “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,” Objective Analysis wrote about the deal. IHS iSuppli countered that DRAM pricing has become markedly less volatile since Elpida’s February bankruptcy announcement, “deviating from long-term trends in statistically significant ways.” A weighted average of DRAM spot prices hovered in a narrow window from Elpida’s announcement through late May, changing 8 points, as opposed to a sample 12-week period in which it changed 37 points. However, “the big question remains whether normal volatility will return once some clarity emerges on the future of Elpida,” said Dee Nguyen, memory analyst at IHS, in advance of Micron’s takeover. Barclays forecast that Micron will take some commodity DRAM capacity off-line while it rebalances its product portfolio.

Table. The IHS iSuppli Momentum Indicator stayed at the 50% level since the bankruptcy announcement, an indication of neutrality with no upward or downward momentum. SOURCE: IHS iSuppli June 2012.

 

12/5/2011

2/20/2012

3/5/2012

5/21/2012

DRAM price index

180

216

235

243

Momentum indicator (%)

50

50

51

50

 

Objective Analysis expects Elpida’s fabs will continue producing DRAM chips, with Micron focusing on NAND Flash scale up at its IMFS fab in Singapore. Micron will output capital expenditures (capex) to upgrade Elpida fabs, though the cost to Micron could be offset with lower internal capex spending, Barclays said.

“DRAM consolidation has finally arrived,” wrote the analysts at Barclays Capital, who see the deal as an even better win for Micron than they expected. To achieve 16% memory market share, MU will focus on integrating Elpida’s mobile DRAM technology, scaling up its PC DRAM production with Elpida’s lines, broadening sales coverage, and exploiting the technology synergies with its acquisition. Objective Analysis sees the combined company cornering a quarter of the mobile DRAM sector, edging out Hynix for second behind Samsung, which controls about half the sector. Combined, Micron and Elpida have a dominant share of Apple’s iPhone mobile DRAM orders. The addition of significant mobile DRAM capacity was heralded by each analyst reporting here.

Elpida’s DRAM process technology has much to offer Micron, Objective Analysis notes. Unfortunately, Micron “has not been efficient” at bringing past acquisitions into its technological roadmap. 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 $500 million in profits. IHS expects a very quick transition and integration at Micron once the deal officially closes, reported Mike Howard, senior principal analyst for DRAM & memory research at IHS.

What to look for at Elpida? Fresh faces in upper management, Objective Analysis suspects, and an end to the DRAM maker’s purely Japanese culture. The deal also frees Elpida from a financial burden, as its creditors will be absorbing significant losses; more than half of Elpida’s debt will not be repaid. The deal sounds a closing note for Japan’s DRAM leadership and indeed participation in the memory sector, which began in the late 1980s. Elpida was “the last important Japanese DRAM provider,” noted Objective Analysis. However, there is “still a very large base of technical capability and intellectual property in Japan, for DRAM and memory design, and process development,” the analysts note, if Micron can take advantage of this material. The majority of the jobs at Elpida will be preserved.

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