In less than one month’s time, Elpida will officially become a wholly owned subsidiary of the US-based semiconductor firm, Micron. The merger, in some regards, is viewed as a largely positive development, one that will not only open up the window of opportunity for future advancements, but also pave the way for favorable transitions within the DRAM industry–most notably in the area of DRAM prices, market supply-demand, and production stability. Where questions are currently being raised, as will be discussed later, is with regards to the “burden-free” nature of the agreement as well as the questionable ways in which Elpida’s shareholders are being treated.
To give a more complete picture of the situation, we thought it might be interesting to delve deeply into some of the key aspects of the Micron-Elpida merger, including: the major stages of the acquisition process; the merger’s various impacts on Micron, Elpida, and the rest of the DRAM market; the diverse ways in which industry observers are attempting to make sense of and dissect the situation; and, finally, the specific future that awaits the DRAM industry upon the eventual completion of the merger.
We begin, first, by looking at some of the most extensively discussed issues, among them the general backlash that Elpida is currently receiving from its financial backers.
From Bankruptcy to Eventual Bailout: Controversies Surrounding Elpida’s Acquisition
On February 27, 2012, Elpida caught a lot of its shareholders off guard when it made the sudden decision to declare bankruptcy, and, later, sought to receive full protection from the local Japanese government. The decision, while justifiable on a few grounds, caused a major stir within the industry, with much of the criticism coming from Elpida’s major shareholders and creditors, module manufacturers such as Kingston, large banking institutions from East China and Japan, and various well known domestic insurance organizations.
The shareholders, in particular, had the most legitimate reasons to be upset: as soon as the bankruptcy declaration was announced and became official, almost $US 1.5 billion to $US 3 billion USD worth of stock value had vanished. If the company’s general equity issues and the subsequent yen appreciation were taken into account, the overall damages that were suffered by Elpida’s shareholders would be even more devastating and incalculable.
The Elpida merger technically isn’t the first lopsided agreement to have ended in Micron’s favor. In 1998, for instance, the US-based memory maker made headlines by “acquiring” seven of Texas Instrument’s manufacturing facilities, all at little to no cost. In 2008, a similar kind of “takeover” situation took place when Micron persuaded the German DRAM manufacturer, Qimonda, to give up all of its shares in Inotera, a Taiwan-based memory maker. These are perfect examples of not just how successful Micron is when it comes seizing acquisition opportunities, but also how effective the company can be when it does so at the proper timing and under special strategic considerations.
Undeniably, to many of the market observers and industry analysts out there, Micron’s acquisition of Elpida will always be remembered for one thing: the damages imparted to Elpida’s major stockholders and creditors. Elpida’s stock value, as reported by various sources with knowledge of the matter, was approximately 900 yen per share before the company decided to officially go bankrupt and give in to acquisition demands. Six months following the bankruptcy statement –and shortly after Elpida released what appeared to be a sorely disappointing financial report- the company’s stock value plunged to nearly unreachable depths, giving the stock holders virtually no choice but to watch all of their rights dwindle away to nothing.
For Elpida’s numerous financial creditors, the Japanese company’s decision to yield to Micron’s acquisition demands proved to be equally hurtful. It is said that to sustain Elpida’s and Micron’s reputations (and to keep the Japanese governments’ public image intact), each of the companies’ press release personnel were asked to report the merger transaction as involving $200 billion yen. Looked at more closely–and picking out all the specific transaction details bit by bit— it would become clear that Micron technically did not have to give up much of its personal finances—if anything at all—to acquire the Japanese chip making company. Technews, a renowned Taiwanese tech blog, describes Micron’s craftily planned payment method for the aforementioned $200 Billion yen as follows:
- First, Micron would provide approximately $60 billion yen to Elpida, before closing time, to handle the company’s existing debt. The planned schedule for the official payment is reportedly set at some point before 2014.
- The rest of the due amount—the remaining 140 billion—will be paid in annual installments in a span of approximately six years, following the completion of the merger between Micron and Elpida.
A few things are worthy of mentioning here. First, since Elpida will have officially become a subsidiary company of Micron by the time any payment is made, the $60 billion yen will technically not count as a loss or a gain for either company. Viewed from a metaphorical or conceptual perspective, what Micron is essentially doing is placing its money from one pocket (its official account) into another (the wholly owned subsidiary account). At the end of the day, that $60 billion yen is and will always be Micron’s.
The 140 billion yen intended specifically for Elpida’s creditors, on the other hand, will not come out of Micron’s pockets at all. Rather, these will be paid out using the revenues that Elpida earns from the abovementioned six year period (from 2014 to 2019).
As outlined in the elaborate diagram below, Elpida’s 440 billion liability will be handled differently depending on which creditor the money is being paid to:
- For the unsecured creditors (ie. Rexchip), given the absence of a collateral guaranteeing repayment agreement, Elpida is only required to repay a minimum of 17.4% of the debt
- For the secured creditors with enough collateral (ie. banking institutions, leasing companies, suppliers with retention rights, etc.), the proportion of the debt owed by Elpida is 100%.
Calculating on the basis of the information mentioned above, Micron, all in all, owes creditors only an insignificant sum of money (around 45% of the debt).
Additional Benefits: What Micron Ultimately Gets Out of the Elpida Acquisition
In both the short term and long term, it is reasonable to expect Elpida to bring to Micron a lot of important, game-changing benefits. Other than the additional manufacturing capacity and equipments, Micron will be granted access to virtually all of the Japanese company’s leading mobile DRAM technology, gain a hold of its existing market share, and receive direct links to its component customers (for instance, Apple). Considering the fact that increasingly more DRAM components are being utilized in smartpone and tablet PC products, Micron will also be expected to enjoy an increased presence in the rapidly expanding mobile device industry.
As stated in a recent report from DRAMeXchange, a division of the global market research firm TrendForce, Elpida’s market share for mobile DRAM is currently only behind those of Samsung (1st place) and SK Hynix (2nd place). With Elpida’s current market shares added to those of Micron, the new Micron group should be able to pose a legitimate threat to the Korean giants and, in the event that everything goes well, challenge the existing status quo in the global market.
Rexchip, a notable subsidiary of Elpida, currently produces around 75K wafer chips a month, and is considered an indisputable leader in the area of PC DRAM production and manufacturing efficiency. The company, in the past, is also known to have manufactured a lot of mobile DRAM components for Elpida. As Elpida currently owns an approximate 65% stake in Rexchip, the majority ownership in the Taiwanese chip maker will eventually shift to Micron as the merger process with the Japanese company completes.
The Future for Micron: Better than Ever?
At the present, word has it that not only is Elpida managing to earn a significant amount of income, it is also becoming much more efficient at producing DRAM-related components; Sources close to Trendinsider suggest the Japanese company’s wafer output to have recently climbed up to as many as 180K per month; With Rexchip’s (75K) and Micron’s (190K) capacities added to the mix, and with the current market price uptrend continuing, there is little question as to the potential for the Japanese company to generate even more significant revenue in the upcoming periods.
Growing Dominance: Micron on the Way to Becoming the World’s Top Five Semiconductor Manufacturer
All in all, with the added manufacturing capacity and the substantially increased customer base, and thanks to growing market share, Micron looks poised to become a major leader in the DRAM industry as well as a top five global semiconductor company (ranking behind Intel, Samsung, Toshiba, and Texas Instruments).
What Micron has essentially managed to accomplish, following the Elpida acquisition, can be summarized as follows:
- Caught up with Samsung in the race to become the world’s largest DRAM manufacturer
- Squeezed into the world’s top five spot in terms of semiconductor output
- Secured steady DRAM market share and long term revenues
- Found a legitimate entry into mobile DRAM territory (thanks to the growth of tablets and smartphones)
- Gained a legitimate status in the eMCP market
- Ensured future periods of high profitability