SAN FRANCISCO -- Samsung called off its $5.85 billion offer to acquire chipmaker SanDisk ( SNDK) on Wednesday.

But the move looks less like Samsung walking away from a deal as it does the beginning of a hard-fought -- and public -- negotiation process.

"My thought is that Samsung is playing hardball," says Robert Katz, a portfolio manager at Senvest International, one of the top 20 institutional owners of SanDisk shares.

The timing of Samsung's announcement is no coincidence. On Monday, SanDisk reported another large quarterly loss and said it would shore up its balance sheet by selling 30% of its chip manufacturing capacity to Toshiba, pushing SanDisk's stock down nearly 12%.

Samsung's announcement Wednesday that it was rescinding its offer to buy SanDisk for $26 a share sent SanDisk shares down a further 32% to $9.93 in midday trading -- its lowest level since 2003.

"If you read the Samsung letter, they don't say they're no longer interested in the SanDisk technology, they're just not interested at $26," says Katz.

"I think by definition, if Samsung comes back to the table, they're probably going to come back lower," he says.

While Katz's firm believed the initial offer undervalued SanDisk, he wouldn't comment on the firm's opinion about any potential new deal.

SanDisk is one of the top sellers of flash memory chips, a type of technology used to store music, video and photos in consumer electronic gadgets like cell phones and MP3 players.

South Korea's Samsung is the world's No.1 producer of NAND flash memory chips, but SanDisk owns many of the key patents for current flash technology as well as future versions of flash such as 3D flash memory and 4-bit per cell technology.

Samsung currently pays SanDisk about $400 million a year in royalties to license its intellectual property, an expense it could eliminate by acquiring SanDisk.

Raj Sharma, an analyst at Polestar Investment Resources, which owns SanDisk shares, believes the ultimate price of any acquisition will have less to do with SanDisk's current share price than it will with some multiple on the $400 million in royalties that Samsung pays SanDisk every year.

By pounding SanDisk's stock, though, Samsung can increase the heat on SanDisk from its shareholders.

As its stock continues to lose ground, it becomes harder for SanDisk to justify its position to shareholders that $26 a share undervalued the firm, Sharma says. "I'm sure there's a lot of pressure on SanDisk now because of where the stock is," he says.

The tactic carries a lot of weight in the wake of Yahoo!'s ( YHOO)refusal to accept a $33-a-share bid from Microsoft ( MSFT)earlier this year. With Yahoo!'s stock now trading at $12.64, and the company recently announcing layoffs, there is a sense that the company shot itself in the foot by spurning Microsoft.

In the case of SanDisk, many of the company's top institutional shareholders have a cost-basis above the $26-a-share price that Samsung previously offered.

SanDisk has argued that its stock is currently trading at a cyclical trough, and that its share price is likely to rise significantly once the balance of supply and demand improves in the market for flash chips.

Indeed, virtually all players in the flash market, including Intel ( INTC) and Micron ( MU), have suffered because of the glut of flash chips currently flooding the market.

As the economy weakens and SanDisk's stock continues to slide though, some investors may prefer to cut their losses rather than wait it out.

The SanDisk/Samsung drama is unfolding across a well-defined timeline. The licensing agreement between the two companies expires in August 2009. After that, Samsung can no longer use SanDisk's intellectual property, which would create obvious problems for Samsung.

That means that some deal, whether an acquisition or a new licensing deal, must occur in the coming months.

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