Should Micron Technology, Inc. Buy SanDisk Corporation? Definitely Not!
Shares of chipmaker SanDisk Corporation (NASDAQ:SNDK) soared on Wednesday after rumors started making the rounds yesterday that the company has put itself up for sale. Two companies, Micron Technology, Inc. (NASDAQ:MU) and Western Digital Corporation (NASDAQ:WDC), are being cited as the likely buyers. The news is being taken skeptically, as investors smell something fishy.
This could be the next big deal in the data storage arena after the biggest tech merger of the year between Dell and EMC Corporation (NYSE:EMC) and the second big tech deal between Apple Inc.’s chip supplier Avago Technologies Limited (NYSE:AVGO) with Broadcom Corporation (NASDAQ:BRCM), both of which created synergistic value for the parties. This deal, however, is making little sense for Micron stockholders.
SanDisk Acquisition Would Be Bad for Micron Stockholders
Micron Technologies is a manufacturer and seller of flash memory products. The two companies have closely aligned operations and are essentially each other’s rivals in the data storage industry. SanDisk has lately partnered with Hewlett-Packard Company to develop a next-generation memory storage that will beat flash by 1,000 times in terms of performance and endurance.
Micron has similarly announced a partnership with Intel earlier this year. Micron and SanDisk are strategically placed in the chip industry as competitors, not partners. Secondly, Micron doesn’t have the financial capacity to engage in this deal, considering the soaring SNDK stock price this morning and the limited cash versus raging long-term debt on Micron’s balance sheet.
As for Western Digital, which currently owns a portfolio primarily in computer storage, it makes some sense for WDC to gain exposure to the flash industry by acquiring SanDisk. But again, the deal wouldn’t happen for free. At today’s highs of more than $69.00, the stock’s market cap now stands at a whopping $14.0 billion, much higher in per-share price than what MU stock and WDC stockholders are recognizing. SanDisk’s price multiples are much higher than Micron’s and Western Digital’s, making the stock overvalued compared to its potential acquirers. An expected year-end earnings per share (EPS) of $3.01 and an average forward price-to-earnings (PE) ratio of 15.5–16.5 gives the stock a rough valuation of $46.65–$49.65.
Here’s the Bottom Line on a SanDisk Acquisition
Bloomberg reported that this might not even result in a conclusive deal, but the news has nonetheless propped up the stock price. Could this be just bait to lure in naïve investors? I’m definitely taking the news with a grain of salt.