SanDisk Beefs Up Flash Stash

SanDisk makes a variety of removable flash cards, which can be inserted into a cell phone to provide storage for things like pictures and music. MSystems sells flash cards that fit into the SIM card slot that's already present in many cell phones.

MSystems also has an embedded flash technology targeted for cell phones, known as mDOC, which combines the best attributes of two different flavors of flash memory: NOR and NAND.

CIBC World Markets semiconductor analyst Daniel Gelbtuch estimates that the market for embedded flash in cell phones was roughly 40 million units last year, out of a total cell phone-handset market of 800 million units. But he believes embedded flash will grow rapidly in the next several years, representing an increasingly large share of the market for cell phone flash chips.

The combination of the two companies' cell phone products means that SanDisk now has a "virtual lock" on the handset market, says Gelbtuch, who upgraded his rating on SanDisk following the acquisition announcement.

CIBC makes a market in shares of SanDisk and M-Systems and expects to receive or seek compensation from SanDisk in the next three months for investment banking services.

The deal comes a month after Micron(MU Quote) completed its acquisition of Lexar Media, another flash memory company. Like the Lexar deal, Monday's acquisition of MSystems illustrates the challenges of surviving in the flash market without strong manufacturing operations.

Going fabless, or outsourcing the actual manufacturing of chips to a third party, is an increasingly popular business model in the semiconductor industry. But in the commodity flash market, there's still no substitute for having a dedicated supply of silicon.

"[MSystems CEO Dov Moran] was probably losing sleep every night about where he was going to get his next source of supply," says CIBC's Gelbtuch. "Now he can get some sleep at night."

MSystems was fond of touting its so-called virtual fab model, by which the company bartered its intellectual property to manufacturers in exchange for capacity at their plants. That model showed signs of stress lately, however, such as in April, when MSystems abruptly cancelled its relationship with Samsung, claiming that Samsung was not meeting the terms of the deal.