Samsung Withdraws $5.8 Billion Bid to Acquire SanDisk

Samsung Electronics Co. Ltd. has withdrawn its proposal to acquire all of the outstanding shares of SanDisk Corporation for $26 per share in cash.

The full text of Samsung’s letter to SanDisk’s Board of Directors withdrawing its proposal follows:

October 22, 2008

Board of Directors
SanDisk Corporation
601 McCarthy Boulevard
Milpitas, CA 95035

Attention: Dr. Eli Harari, Chairman and Chief Executive Officer, Mr. Irwin Federman, Vice Chairman and Lead Independent Director

Dear Eli and Irwin:

After nearly six months of efforts to pursue a transaction with no meaningful progress, we are withdrawing our proposal to acquire SanDisk. I am disappointed that we have been unable to reach an agreement on our proposal. I continue to believe that a combination of our two companies would have created a superior global brand, an unparalleled technology platform and the scale and resources to drive convergence in the marketplace. Had we been able to execute on our proposal, your shareholders would have received full, fair and certain value for their shares and your employees and other stakeholders would have benefited from a broader platform and a wider range of opportunities.

Nevertheless, we have obligations to our own shareholders which require that we take a disciplined approach, particularly with respect to significant initiatives such as this. That disciplined approach requires that we squarely face 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. 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. As a result of these developments, we are no longer interested in acquiring SanDisk at $26/share.

While I regret that we were unable to work together to achieve a business combination that would have created new opportunities for all of us, we wish you the best in meeting the challenges ahead.

Sincerely,

Yoon Woo Lee, Vice Chairman & CEO, Samsung Electronics Co., Ltd.

Comments

Her is the comment of Jim Handy, analyst at Objective Analysis.
On Wednesday, October 22, Samsung announced the withdrawal of its $26 bid for SanDisk shares. Explaining that “…your shareholders would have received full, fair and certain value for their shares and your employees and other stakeholders would have benefited…” Samsung gave their reasons to believe that SanDisk was errant in its expectations for the current market situation to improve in the near term. Samsung explained that there are: “growing uncertainties in your business, which may continue to deteriorate in this difficult economic environment and further impact your standalone value.” Samsung also noted: “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…”
SanDisk's Response
SanDisk replied within three hours that: “SanDisk's Board has remained open to a transaction that recognizes SanDisk's long-term value and contains the right protections for SanDisk's shareholders”
The company argues that: “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.”
Positioning, Positioning, Positioning!
Samsung certainly noticed that even an obscure move by SanDisk caused SanDisk’s share price to fall. Although there are polar disagreements about SanDisk’s motive for restructuring its JV with Toshiba, the stock market’s response drove SanDisk’s share price from around $16 to around $14 even though SanDisk will be improving their cash position with this agreement. Keep in mind that the initial offer by Samsung made SanDisk’s price jump from $13.50 to $21. It appears that most traders feel that SanDisk’s value without Samsung is far lower than it is with Samsung.
We are not investment analysts, and do not advise stock purchases, nor do we hold a position in SanDisk stock, but as an observer on the sidelines we are inclined to expect a similar response to the Samsung announcement when the US markets open on Wednesday, driving SanDisk’s price even lower. Those who saw Monday’s Toshiba deal as a bad sign are likely to read Samsung’s most recent announcement as something far worse.
This has so far been quite a melodrama, and we anticipate further very significant announcements before the matter is put to rest. With this there will probably significant share price shifts at SanDisk. This is no market for the timid!
This is good for Samsung. 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.
But, as we have told numerous reporters over the last few days, both companies’ boards are acting in the best interests of their shareholders. Samsung has a fiduciary duty to avoid renegotiating a very expensive royalty agreement that expires in August. If Samsung acquires SanDisk, not only will they avoid paying some $200 million a year in royalties, but they will also be able to collect $200-300 million in royalties from SanDisk’s other licensees. On the other hand, SanDisk has the fiduciary duty of getting a price that accurately reflects not current market conditions, but the value of the company over the long term. The company has spent significant efforts and capital to garner a patent portfolio that gives it control of nearly every aspect of its markets over the long term, and these patents are very likely to be far more valuable in the future than they have been in the past.