Samsung Buying Sandisk?

Defying skeptics who had warned that a deal would face significant hurdles, Samsung this afternoon announced that it has offered to buy SanDisk for $26 a share in cash. While Samsung had previously said it might be interested in buying SanDisk, many on the Street were convinced that Samsung was more interested in improving its negotiating position on a renewed license agreement over NAND-related patents than actually buying the company. But today the skeptics on the potential for such a deal - and I count myself among them - have been proven incorrect.

This is clearly not a friendly deal. The Samsung announcement notes it is “reiterating” its proposal to acquire Samsung, and includes a length letter to SanDisk’s management that makes it clear that the two companies had been talking for months, but that SanDisk had wanted a higher price. The hostile nature of the offer makes the potential regulatory obstacles to the deal - the combination would own a majority of the global NAND flash production capacity - all the more daunting.

In the letter, Samsung rips SanDisk for continuing “to cling to unrealistic expectations on both its standalone market value and an appropriate merger price.” The company notes that the offer is a large premium to SanDisk’s recent stock price, and says the porposed deal would not require any financing, and would be financed by Samsung from cash on hand.

In after hours trading, SanDisk shares have jumped $8.16, o4 54.3%, to $23.20.

Here’s a copy of Samsung’s letter to SanDisk:

September 17, 2008

Board of Directors
SanDisk Corporation
601 McCarthy Boulevard
Milpitas, CA 95035

Attention:

Dr. Eli Harari, Chairman and Chief Executive Officer
Mr. Irwin Federman, Vice Chairman and Lead Independent Director

Dear Eli and Irwin:

We are in receipt of your letter dated September 15, 2008 and are deeply disappointed that after four months of discussions and meetings – in Seoul and San Francisco – about a possible business combination, SanDisk Corporation (“SanDisk”) continues to cling to unrealistic expectations on both its standalone market value and an appropriate merger price. Under our proposal, which we are reiterating here, we remain prepared to acquire all of the outstanding shares of SanDisk for $26 per share in cash. As you know, our proposal is not subject to any financing contingency and the entire purchase price will be funded with our cash on hand and available financing.

This offer is full and fair and we believe that, given an opportunity, your shareholders would agree. It constitutes a very substantial premium to SanDisk’s share price and would deliver to your shareholders an immediate cash premium of 93% over SanDisk’s closing share price on September 4, 2008, the day before news reports indicated that we were in discussions about a business combination. Furthermore, it is a premium of 80% over your closing share price on September 15, 2008, and a 66% and 164% premium to your 30-day weighted average price and enterprise value as of September 4, 2008, respectively.

Despite the significant premium we propose to SanDisk’s current stock price, your letter states that our proposed price does not “reflect the intrinsic value of SanDisk’s business” and references the 52-week high. The world has changed dramatically in the past 52 weeks as can be seen from SanDisk’s own disappointing results. Consumer spending and the overall economic situation have been getting worse. It will take the NAND flash market quite a bit of time to recover. Notwithstanding the current market conditions, to stay competitive, SanDisk will need to fund critical investment and development over the next several months – cost cutting alone will not suffice. Our offer insulates your shareholders from the risk of market conditions that have severely deteriorated and are expected to remain challenging. As highlighted above, we strongly believe that there is significant execution risk of achieving any stand-alone plan.

While it has been and remains our strong preference to continue to work with you to reach a binding merger agreement in a cooperative and expeditious fashion, we have become increasingly concerned that the lack of progress is not serving the interests of either company’s shareholders. For this reason, and the fact that speculation has grown since the early September news reports, we feel compelled to clarify our intentions publicly.

Compelling Business Logic

Our many meetings and conversations over the last several months have served to confirm for us that a combined Samsung-SanDisk would have a superior global brand, an unparalleled technology platform and the scale and resources to drive convergence in the marketplace. With SanDisk’s innovative culture and technology leadership and Samsung’s scale, leadership in manufacturing and execution, and strong systems and consumer electronics segment knowledge, the combined company would be well positioned to accelerate the adoption of flash memory technology in new markets. We can also establish the platforms and capabilities necessary to position flash as the preferred vehicle for delivery and storage of a wide variety of content, such as film, in a way that would not be possible for either of our companies alone.

As we have seen in recent months, markets have become more turbulent and global economic trends are negative. At the same time the competitive environment remains challenging. To survive and compete in these times we will each need to leverage our resources and rely upon a strong balance sheet to fund critical investment and development through good times and bad. Separately investing in necessary state of the art facilities will be a significant tax on your business in the near term. In addition, reliance on IP and enforcing it is a costly and uncertain business for both our companies. Faced with these challenges, now is the time to merge.

SanDisk’s Management and Employees

SanDisk is widely recognized for the quality of its people and its culture of innovation. For our part, that is a key reason we are attracted to your company and a significant portion of the transaction value to us is represented by the talented management and employees that we hope would continue to work for the company going forward. Our intention is to operate SanDisk as a separate subsidiary company inside of Samsung and to maintain the environment that has contributed to your success. We have a long term commitment to the space, financial stability and a strong desire to grow the SanDisk platform, thereby creating significant new opportunities for SanDisk employees. We do not plan to cut jobs – rather, we want to work with you to find the best way to structure incentives to retain and motivate your key talent following the transaction.

Process and Deal Certainty

At our July 22 meeting in San Francisco you proposed a process in which Samsung would forego customary due diligence, not only until all transaction terms including price are finalized and documented, but also until we had completed negotiation and execution of a replacement IP licensing agreement and a new supply agreement, neither of which would ever come into effect if an acquisition transaction were finalized. You have also requested as a condition to moving forward that we provide you with some form of assurances as to regulatory approval.

Although there had been a lack of progress over 14 months of IP discussions, we dedicated significant time and energy to follow the path you outlined in order to reach an agreement. Unfortunately, the process you outlined in July has resulted in no meaningful progress toward a transaction in the intervening eight weeks. Despite our substantial efforts on the IP front, you have agreed to schedule only two meetings since July and during those meetings you have been unwilling to engage with us on any productive proposals that adequately recognize the changed market dynamics in your markets and the decline in value of your patent portfolio in the period since the IP license was last renewed.

As to the regulatory process, we have repeatedly expressed our confidence that this transaction will receive all necessary governmental approvals and we remain willing to immediately engage your experts to discuss the regulatory process. You have yet to even identify to us who is acting as your counsel on these issues. Having dedicated significant time and resources in evaluating this combination with our external counsel, we do not foresee any issues that could not be resolved. We again extend the invitation for your advisory team to engage with our counsel, subject to customary protective provisions, to share our respective views on this topic.

Confirmatory Due Diligence

Although we have completed extensive preliminary due diligence based on publicly available information, our proposal is of course subject to confirmatory due diligence and the negotiation of a definitive merger agreement. Key due diligence topics that underlie the value in our offer include your relationship with Toshiba, forecasted operating plans, R&D projects, technology roadmaps, key employees and pending litigation.

Again, it continues to be our strong preference to work together with the SanDisk Board to reach a mutually agreeable transaction. We have drafted and are prepared to send to you a due diligence request list and a draft merger agreement. We again urge you to engage with us promptly in a productive discussion about our proposal.

Sincerely,

Yoon-Woo Lee
Vice Chairman and Chief Executive Officer
Samsung Electronics Co., Ltd.

SanDisk (SNDK) said its board has rejected Samsung’s $26-a-share cash takeover offer as “inadequate in multiple respects” and not in the best interests of holders. The company actually rejected the offer in a letter to Samsung yesterday; Samsung responded by publicly disclosing its offer.

SanDisk contends the Samsung offer “does not reflect the value of the substantial synergies that Samsung can attain from an acquisition,” noting that Samsung previously indicated it might be willing to pay a premium to SanDisk’s $28.75 a share closing price on May 22, “the date Samsung first approached SanDisk with respect to an acquisition.”

SanDisk also branded the Samsung offer as “an opportunistic attempt to take advantage of SanDisk’s current stock price, which is significantly depressed given industry cyclicality, the uncertainty resulting from the unresolved patent cross license agreement renewal with Samsung, and general equity market conditions.”

The company says the offer in fact may be “a calculated negotiating ploy or an attempt to gain leverage in the ongoing licensing negotiations between the companies, particularly in light of the fact that the parties have met over 10 times on this issue since June 2007.”

The company said it remains willing to negotiate with Samsung, but that “due to Samsung’s unwillingness to meet fair and reasonable process conditions coupled with their desire to acquire SanDisk at a significant discount to our view of its intrinsic value, the Board believes that this proposal is not in the best interests of stockholders.”

Here’s a copy of the letter SanDisk sent to Samsung on Monday rejecting the offer:

September 15, 2008

Yoon-Woo Lee, PhD
Vice Chairman and Chief Executive Officer
Samsung Electronics Co., Ltd
Samsung Main Building
250, 2-ga, Taepyeongno
Jung-gu, Seoul 100-742
Republic of Korea

Dear Dr. Lee:

This letter confirms many of the points we raised when we met with you last week. We received your unsolicited, non-binding proposal dated August 9, 2008 to acquire SanDisk Corporation for $26 per share in cash. After a detailed review, with advice from our outside financial and legal advisors, our board of directors has unanimously concluded that your proposal significantly undervalues SanDisk given the longer-term prospects of our business and does not reflect the substantial synergies Samsung can obtain from the proposed acquisition. In addition, your proposal fails to provide adequate deal certainty, thereby exposing SanDisk and its stockholders to unacceptable risk. Finally, your approach raises the question of whether this action is simply an effort to gain leverage in the ongoing negotiations to renew our patent cross license agreement and evidences an unwillingness to engage in a process designed to legitimately protect SanDisk’s stockholders’ interests.

We acknowledge the interest that you have expressed in SanDisk over the past few months and, as expressed in the discussions we have had since May 2008, the SanDisk board of directors remains open-minded about a transaction that appropriately addresses the issues of value, deal certainty and process. However, for these and other reasons we believe your proposal is not consistent with the SanDisk board of directors’ objective of maximizing stockholder value and is not in the best interests of SanDisk’s stockholders.

VALUE

While you emphasized that your offer is a premium of 56% over the stock price on the date of your non-binding proposal, in our meeting on May 22, 2008 you implied that Samsung was prepared to pay a significant cash premium over the then $28.75 price of SanDisk’s shares. Today, SanDisk’s share price is close to its lowest price in five years, and your offer represents a 55% discount to the 52-week high. SanDisk’s stock price is significantly depressed at this time given industry cyclicality, the uncertainty resulting from our unresolved patent cross license agreement renewal with you and general equity market conditions, and therefore does not reflect the intrinsic value of SanDisk’s business.

The flash memory business is a cyclical growth market, which is characterized by periods of strong growth and profitability such as we saw between 2002 and 2007, punctuated by periods of oversupply and declining flash prices like those we are experiencing today. Our board of directors is focused on creating long-term value for our stockholders and believes that SanDisk has the right strategy and the requisite financial resources to manage through a prolonged downturn and emerge as a stronger competitor. We are taking appropriate actions to further fortify our financial position and are confident that in the longer term we will benefit when exciting new flash applications, such as storage in multimedia handsets, flash solid state drives, and new consumer portable applications fuel the next period of industry profitability and growth.

You have described on numerous occasions the significant synergies that Samsung will achieve from acquiring SanDisk, one of the reasons why we believe you were willing to pay a significant premium over the $28.75 share price on May 22, 2008. Nothing has materially changed since that date in terms of the synergies Samsung can realize from acquiring SanDisk. These include avoiding billions of dollars of royalties over the coming decade; gaining access to our x3 (three bits per cell) and x4 (four bits per cell) knowhow; owning our advanced controller technology; owning all of the leading card formats; gaining control of our revolutionary 3D (three dimensional rewritable semiconductor memory) technology - the best candidate to replace NAND flash in the coming decade; controlling our strong brand, broad retail distribution and leading market share in flash cards worldwide; and other cost and revenue synergies.

We also note that the run rate of Samsung’s royalties to SanDisk continues to grow. Our view remains that without the right to use SanDisk’s patents, Samsung’s stand-alone NAND business’ prospects would be significantly compromised. Conversely, ownership of our fundamental patent portfolio would greatly strengthen your patent position in emerging markets for flash storage like SSDs and managed NAND chipsets. We hope that your current offer is not an attempt to capitalize on the uncertainty reflected in our share price while this IP issue remains unresolved or a negotiating tactic in the licensing negotiations. SanDisk’s stockholders deserve to be fairly compensated for the value SanDisk offers Samsung, and your current offer fails to recognize and monetize this value.

DEAL CERTAINTY

From the outset, we have expressed to you our concerns about the risks to SanDisk of moving forward with a transaction with Samsung if an announced transaction does not close. We note that any transaction between SanDisk and Samsung will be subject to regulatory review, including in the United States and the European Union. In addition, any announcement of a transaction with you could also have a negative impact on our business due to various factors. The simple, but important, point is that without both maximum certainty of closing as well as a viable path for SanDisk to continue as an independent entity should the transaction not close despite your best efforts, your proposal creates unacceptable risks for our stockholders and is not in their best interests.

Because of this, we have proposed negotiating a replacement cross license and supply agreement, both of which would become effective in August 2009 if an announced transaction does not close. We have also requested that you commit to certain terms to ensure that a transaction has maximum certainty of closing. Despite our repeated requests Samsung has failed to address these legitimate concerns.

PROCESS

We have been clear that together with price, these critical issues of deal certainty and risk mitigation must be addressed before we provide you due diligence access to the highly confidential and competitively sensitive information that you have requested. We note that there are sizeable synergies in this transaction for Samsung, most of which you control and can determine without access to confidential information. In addition, given that Samsung operates in the same industry and that SanDisk is a public company, we are confident that Samsung possesses the necessary information to address the issues we have highlighted above prior to gaining access to confidential information. However, despite our many attempts, including those by our lead outside director, Mr. Irwin Federman, to communicate the importance of these process issues and offering a reasonable roadmap by which we both can address them, you have rejected our guidance and instead insisted on access to highly confidential information about SanDisk before these issues are resolved.

CONCLUSION

The members of the SanDisk board of directors have taken, and will continue to take, their responsibilities to SanDisk’s stockholders extremely seriously. We remain committed to the goal of maximizing stockholder value. As Mr. Federman has said to you on multiple occasions, including in our recent meeting in Seoul, on September 11, 2008, the SanDisk board of directors is open minded about a transaction with Samsung if it represents a price that recognizes the long-term intrinsic value of SanDisk and the significant synergies that accrue to Samsung, provides deal certainty to SanDisk and can be conducted in a process that adequately protects the interests of SanDisk’s stockholders. Samsung’s current offer and approach falls well short on all counts. As such, we respectfully reject your proposal.

Very truly yours,

Eli Harari, PhD

Chairman of the Board and Chief Executive Officer