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Skittish Samsung Spurns SanDisk, But Toshiba Still Feels The Love

Samsung ixnays bid to acquire SanDisk, cites Toshiba tie-up and disappointing third quarter earnings.

flash memory

The love triangle began with Samsung's unsolicited bid for SanDisk that equaled $26 per share in an all-cash deal, an offer than SanDisk immediately rejected, saying it greatly undervalued the company.

Then on Monday, SanDisk announced it entered into a binding memorandum of understanding with Toshiba to sell roughly 30 percent of its current manufacturing capacity of the two companies' joint venture. SanDisk said that the companies will also continue its equal partnership in the remaining 70 percent of their joint venture and will continue to jointly invest in future opportunities.

That move was apparently that last straw for Samsung, whose vice chairman and CEO Yoon Woo Lee said in a statement that it seemed to be a "hurried renegotiation".

In his Dear John letter to Samsung on Wednesday, Lee said that while he was "disappointed" about the failed negotiations between the companies, he was also worried about "the growing uncertainties in your business, which may continue to deteriorate in this difficult economic environment and further impact your standalone value. Your recently announced third quarter results serve only to illustrate this risk."

On Monday, SanDisk posted third-quarter 2008 revenue of $821 million, a 21 percent drop compared to the same quarter a year ago. In accordance with GAAP measures (U.S. Generally Accepted Accounting Principles), the company suffered a net loss of $155 million compared to a GAAP net income of $85 million in the same period a year ago.

Eli Harari, SanDisk chairman and CEO, tried to spin a rosier picture for investors, despite numbers to the contrary.

"Excess inventories resulted in severe pricing pressures and a disappointing loss for the quarter including $109 million of inventory related charges," Harari said in a statement. "To further strengthen our balance sheet we are taking decisive actions including: restructuring of our fab joint ventures, deep cuts to our 2009 fab capacity investments and substantial expense reduction measures for 2009.

"We believe the industry-wide moves to curtail flash capacity expansions are sowing the seeds for the next recovery. "We believe we can maintain our strong market position with our industry lead in manufacturing 3-bits per cell Flash, our strong execution of the 43-nanometer technology transition, our diversified OEM and retail global sales channels and our strong balance sheet."

Whether it was SanDisk singing "Love The One You're With," or its underwhelming third quarter earnings, Samsung had enough.

"Your surprise announcements of a quarter billion dollar operating loss, a hurried renegotiation of your relationship with Toshiba and major job losses across your organization all point to a considerable increase in your risk profile and a material deterioration in value, both on a stand-alone basis as well as to Samsung," Lee said in a statement.

In response to the rejection, SanDisk fired back, saying in a statement that from the start of Samsung's bid proposition, it had remained open to a transaction that "recognizes SanDisk's long-term value" but said that Samsung was unresponsive.

"We repeatedly outlined a clear path to hold further discussions, including most recently in our letter on September 15, and Samsung consistently chose to ignore that path and, in fact, never contacted SanDisk regarding their proposal after we delivered our letter. We believe this raises questions about the real motivations behind Samsung's offer."

SanDisk did not elaborate about what it perceives as what the "real motivations" were.

"This is good for Samsung," said Jim Handy, a researcher at Objective Analysis, in a note. "Samsung's stockholders will be rewarded if the company can acquire SanDisk at the lowest possible price. Today's announcement should help Samsung push SanDisk's share price lower, making it possible to acquire the company at a better deal than the $26 per share that Samsung previously offered"

Handy's speculation may be accurate; as of midday trading, SanDisk shares fell nearly 31 percent. But considering the market's continuing volatility, SanDisk is certainly not alone in taking a beating in the tech sector.

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