Lexar Deal Gets Its Due

"Whatever people thought the valuation should be last week, now that we've seen the Q1 [guidance] and the precipitous drop in revenue, it seems patently obvious to me that that number just got smaller," Stone said.

In the filing regarding the Lexar-Micron deal, Lexar touched upon its challenges in the current quarter, noting that it had to cut prices significantly during the first quarter in response to market pressure.

Because Lexar does not produce its own flash memory chips, the company has found itself in a competitive disadvantage to companies like SanDisk(SNDK Quote) as prices for NAND flash chips have rapidly come down. To remain competitive in the market, Lexar must slash its retail product prices, while continuing to buy flash chips at higher, prearranged prices from Samsung, its supplier.

John Reimer, the founding CEO of Lexar who is no longer involved with the company, says the relationship with Samsung was initially designed to be a strategic alliance providing Lexar with favorable pricing and supplies of flash chips. But he says the relationship never lived up to its potential.

"A structure was put in place to allow it to work but it didn't have enough detail or teeth in it to absolutely guarantee it," says Reimer.

According to Tuesday's filing, Lexar considered replacing Samsung with a different strategic supplier as an alternative to merging with Micron. Lexar had discussions with an unnamed flash chip manufacturer under which Lexar would have received a guaranteed volume of flash chips and certain favorable pricing terms, as well as an equity investment from the supplier.

According to the filing, Lexar explored, and ultimately decided against, other options to turn the company around. One option involved a proposed partnership with an unnamed flash chip manufacturer under which Lexar would have received a guaranteed volume of flash chips and certain favorable pricing terms, as well as an equity investment from the supplier.

Lexar's management nixed the deal in favor of the Micron buyout, concluding that even under the supply arrangement, Lexar would continue to be exposed to price fluctuations in times of tight supply, and that the equity investment was potentially dilutive and could adversely affect future strategic transactions.

Another option involved selling the company's intellectual property portfolio -- which includes valuable flash memory controller patents -- and its operating business separately.

By combining with Micron, which recently announced a flash memory manufacturing joint venture with Intel(INTC Quote), Lexar will get access to its own supply of flash chips.

"Lexar's board of directors believes that the merger presents an opportunity to combine two leaders in different segments of the memory semiconductor business, and will position Lexar to benefit from a reliable and competitively priced supply of flash memory," reads the filing.