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Lexar Media


had merger talks with 11 different companies, but only two firms, including eventual winner


(MU) - Get Micron Technology, Inc. Report

, made formal bids.

In a much-anticipated

Securities and Exchange Commission

filing Tuesday, Micron and Lexar laid out the background of a controversial sales process that culminated with Micron's offer to acquire Lexar on March 8. The deal has drawn opposition from a group of hedge funds, claiming that it significantly undervalues Lexar.

Meanwhile, Lexar's warning on Tuesday that first-quarter revenue could be as much as 50% below Wall Street expectations underscores the company's difficulties of continuing operations as an independent entity.

Together, the dual filings cast doubt on activist shareholders' contention that Lexar is worth significantly more than what Micron has offered to pay for it.

In late trading, Lexar was recently off 72 cents, or 7.73%, to $8.60. Shares of Micron were off 2.2%, or 33 cents, at $14.44.

According to the filing, Lexar explored a potential buyout with the help of investment banking firm Deutsche Bank for about a year before the Micron announcement. Last November, Lexar received an offer of $8.75 a share from an unnamed company, but the deal fell through because of the offer's timing terms and antitrust concerns.

That offer would have put a higher price tag on Lexar than Micron's, which valued Lexar shares at $8.43 on the day it was announced, based on Micron's stock price at the market's close that day. Under the terms of Micron's acquisition, each Lexar share will be worth 0.5625 of a Micron share.

CIBC World Markets analyst Daniel Gelbutch said that while the other deal was slightly richer than Micron's, it's a far cry from the $10-plus a share that he says opponents of the deal believe Lexar could fetch.

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"The bottom line is it looks like management didn't just willy-nilly sell it to serve their interests," said Gelbtuch, whose firm makes a market in Lexar securities. "They spoke with everyone in the field who is a potential buyer, and no one stepped up to the plate to offer something higher."

Since the announcement of the deal, a consortium of hedge funds, including Carl Icahn's Icahn Partners, have amassed large stakes in Lexar in hopes of pressuring the company to find another buyer who will pony up more cash. Lexar also has been hit with several class-action lawsuits in California state court, alleging that Lexar's board engaged in self-dealing and failed to obtain the highest possible price for the company.

In an SEC filing earlier this month, Elliott Associates, which owns 6.5% percent of Lexar, stated its extreme displeasure with the Micron deal, which it claimed "falls meaningfully short of Lexar's standalone value."

"We believe this outcome was the result of the Company's failure to conduct a robust and thorough sale process, and we fully support and encourage interest from other parties at levels more closely reflecting Lexar's true value," said the filing.

Calls to Elliott Associates, as well as Icahn Partners, were not returned.

In making its case for a richer Lexar valuation, Elliot Associates laid out scenarios in which Lexar operates with gross margins between 18% and 23%.

That scenario seemed less likely Tuesday, when Lexar delivered guidance for the current quarter in which it warned that revenue would be between $100 million and $130 million, with a loss in the range of $22 million to $30 million. Analysts polled by Thomson First Call were expecting sales of $200 million for the quarter, with a loss of 19 cents a share.

While the warning didn't provide specific information on margins, Cowen & Co. analyst Rob Stone estimated that the guidance suggested product margins between 3% and 4%.

"Under current market conditions on a standalone basis, Lexar would be doing extremely well to get back to the low-teens on product margins. And high-teens would be unlikely," said Stone, who does not have any position in Lexar and whose firm has not had a client relationship with Lexar.

"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



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


(INTC) - Get Intel Corporation Report

, 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.