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Samsung's SanDisk Bid May Prove Too Low

SanDisk's CEO says Samsung's buyout bid didn't take into consideration an improvement in business conditions.






gird for the tech industry's latest hostile takeover battle, the swordplay is familiar.

SanDisk CEO Eli Harari accused Samsung

with its $26 a share bid

of seeking to pick the company up on the cheap -- a 94% premium from its price earlier this month, but a steep discount from SanDisk's 52-week high of $55.98.

While it's hard to fault Samsung for spotting a bargain and pouncing, Harari has a point that could carry some weight as shareholders mull the offer.

Unlike other acquisition targets that claim they have been undervalued, Harari has one particularly cogent weapon on his side: the memory business' famous cyclicality.

With a glut of NAND flash chips currently flooding the market, producers have seen their profits shrink and their stocks get pummeled. Like the

old Weeble toys

that never stay down though, the flash business always seems to correct itself in the end.

"Although the stock market is highly disenchanted with the memory markets today, those who understand the nature of semiconductor cycles realize that once demand rises to absorb all of today's overcapacity, which indeed it will, prices will firm, profits will resume, and stock prices will soar," wrote Jim Handy, a memory analyst with market research firm Objective Analysis, in a note about the deal.

According to Handy, who does not own SanDisk shares, that means it's not unreasonable to expect the stock to rebound to the level of its 52-week high, or higher.

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Indeed, SanDisk's stock has experienced swings of $20 or more in either direction at least six times since 2000 as the flash industry worked its way through various boom-and-bust cycles.

In addition to the resistance of SanDisk itself, Samsung will have to make a case to SanDisk's shareholders that they're not better off simply waiting for the business conditions to improve.

Raj Sharma, of Polestar Investment, which has a position in SanDisk, describes Samsung's bid as a low-ball offer and believes there's a good chance SanDisk shareholders won't approve the deal if it gets to a vote, given how high the stock price was just a year ago and the promise of a recovery that's inherent in the flash business.

The importance of flash memory in consumer electronic gadgets like cell phones, digital cameras and MP3 players is not going away. In fact, as prices for flash memory remain low, the technology becomes more viable for new applications, such as a replacement for PC hard drives.

But with consumer demand becoming more uncertain amid a slowing economy, it's hard to pinpoint when the flash business will emerge from its slump.

The flash industry's latest downturn, which began in 2007, has already surprised many by how long it has lasted. And there is still no light at the end of the tunnel.

"This is probably the most serious downcycle that the NAND flash has experienced," says Gregory Wong, a flash memory analyst at Forward Insights. Last year NAND flash prices were down 58%, and he says prices could fall a further 65% this year, making it increasingly difficult for companies to weather the storm.

"It's becoming more urgent now because companies are starting to lose money," Wong says. "The question is who can hold out the longest, because at least until probably the middle of next year there doesn't seem to be anything that 's going to put it back into balance."

SanDisk may be in better shape than some of its competitors, due to its manufacturing cost advantages and its

valuable trove of intellectual property

. While the average analyst estimate sees the company posting a loss of 29 cents a share this year, SanDisk is expected to turn a profit in 2009, according to Thomson Reuters.

Shareholders don't necessarily have the luxury of waiting for better times. As the current bear market wreaks havoc on the portfolios of many institutional shareholders, the potential for a quick payoff may prove irresistible.

And patience for boards that turn down deal offers with premiums is wearing thin.

Doug Whitman, of the Whitman Capital hedge fund, says he's noticed more acquisition deals being rejected than ever before in his 20-year-plus career.

While he doesn't own SanDisk or know the specifics of that particular situation, he says he generally objects to boards who dismiss hefty premiums in the name of shareholder's best interest.

"It's kind of arrogant to say, 'Hey we rejected the offer because we're going to be worth a lot more,' " says Whitman. "I'd rather have the hamburger today."

So might shareholders of other companies that rebuffed mergers.



turned down


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offer of $33 a share. At Tuesday's market close, Yahoo!'s stock was $18.82.

"The market is telling you they made a mistake," says Whitman.