SanDisk Beefs Up Flash Stash

Updated from 3:29 p.m. EDT

SanDisk's(SNDK) arsenal of flash memory assets looks more formidable than ever following Monday's announcement of its plans to acquire MSystems(FLSH) for $1.35 billion.

The deal strengthens SanDisk's position in two key markets for flash memory chips, provides it with significant intellectual property and gives it a promising technology that could dictate the future of flash -- all for what some analysts and investors consider a bargain.

The all-stock transaction values each share of MSystems at 0.76 of a share of SanDisk common stock, about a 13% premium from the price at Friday's close of market.

"Given that the premium is so meager, I'm wondering if MSystems is going to report a pretty ugly quarter on Monday," says Seligman Technology analyst Sangeeth Peruri.

Analysts expect MSystems to post a profit of 22 cents a share on $206 million in revenue for the second quarter. Shares of the Israeli company have been under pressure of in recent months, as MSystems announced it would restate five years of previous financial reports as a result of an internal investigation into its stock-option accounting and pulled the plug on a secondary stock offering.

Shares of MSystems surged more than 13%, or $4.21, to $36 on the news, while investors bid down SanDisk shares by 48 cents, or 1%, to $46.66. But Peruri and others say the marriage makes a lot of strategic sense for SanDisk.

MSystems had $415 million in sales of USB flash drives in 2005, which will provide a nice bump to SanDisk's USB drive business.

Perhaps even more significant is the fit between the two companies when it comes to cell phones, which many consider the most important market for flash chips in the near term. As cell phones take on increased functionality, flash memory, which stores data even when the power is switched off, is expected to play a larger role in the handsets.