In the parlance of today’s youth, Samsung could be said to be “all up in SanDisk’s grill.” But why? Why would a massive South Korean company with factories around the world be focused on a fairly small memory manufacturer with a total revenue of $3.9 billion? To put this into perspective, Samsung did $100 billion in 2007 which means Samsung has, in the common parlance, “more money than God.”
To recap, Samsung offered $26 a share for SanDisk and SanDisk politely refused. Here is what I think is going on.
Samsung wants flash memory manufacturing capacity. As devices move away from spinning platters – I predict that in the next decade we will see the end of the optical disk and in another 15 years the end of the hard drive – to solid state storage. Solid state storage is comparatively cheap and it is a burgeoning market. The fact that 4GB drives thumb drives are still considered exotic is an important part of Samsung’s reasons for picking up SanDisk. The market can only grow as folks realize that solid state disk drives are faster and more efficient than hard drives and, thanks to the slow development of larger and larger flash drives, folks keep upgrading their chips.
Samsung, in short, needs more manufacturing capacity. With Samsung flash storage in almost every device around the world, the manufacturer is considered the top memory chip maker yet it still faces extreme shortages when new products like iPods and iPhones spike demand. The result is embarrassing for Samsung simply because the headlines read “Samsung unable to maintain Flash memory orders.” This happened often in the LCD space as well and, as a result, manufacturers ramped up production by building factories. Why build, however, when you can buy?
So why SanDisk? SanDisk is part of a triumvirate of smaller flash producers – Kingston and Lexar make up the other two points in the triangle – and, most importantly, SanDisk pioneered a considerable amount of the IP and patents that go into making a flash drive. As a result, SanDisk is tempting in its capacity and it’s know-how. Consumers also equate SanDisk with “thumb drives” and, a result, data storage safety. Folks like Lexar and Kingston have found their own niches, niches that Samsung may or may not need to take over in time.
The question, then, is this merger “good” for either party. This enables Samsung to cement its lead in the market while picking up a trusted brand in memory. For SanDisk – well, the hope is SanDisk can stand on its own and keep selling flash memory to a hungrier audience. $3.9 billion is nothing to scoff at – Lexar did $412 million but Kingston did $4.5 billion, placing SanDisk spot in the middle. However, being subsumed by the South Korean borg is a difficult prospect for any company, especially one whose future is actually fairly rosy. Expect hard, background negotiations for the next few days, a cooling off period, and an October surprise once SanDisk begins fighting a slowing economy and sad-eyed holiday season. I can’t see SanDisk ever selling, but we could see a “major investment” in the company, ensuring Samsung gets its hands on lots of tasty SanDisk flash.