Micron’s teething problems

Micron is expected to undergo considerable teething problems as it digests Elpida, says IHS.

“Micron’s previous acquisitions in years past of specialty memory makers Numonyx and Inotera presented unanticipated surprises, and in some ways Micron is still digesting those purchases. Adding Elpida to the mix is unlikely to hasten the rest of the complicated integration process that Micron still needs to do with its earlier buyouts,” says IHS’ Mike Howard.

Micron’s buyout of Elpida is expected to boost its DRAM production volume to approximately 370,000 wafer starts per month over the long term, up 131% from 160,000 putting it into the No.2 position in the DRAM league.

Samsung has 400,000 wafer starts per month. Based on Q1 rankings, the Micron acquisition will boost its standing to 24.8% share of the DRAM space, behind Samsung’s 40.8% portion but ahead of Hynix’s 24.2%.

Purchase price was $2.5bn of which $750m is to be paid in cash. The cash portion of the payment is intended for Elpida assets and will be due at the close of the deal, expected sometime in 2013.

The cash payment won’t necessarily reduce the cash balance of Micron, as it will gain access to all of Elpida’s cash and current assets on the bankrupt company’s balance sheet.

Elpida at the end of December 2011 had approximately $1.4bn in assets.

The other part of the purchase price is the remaining balance of $1.75bn. This part of the payment, which does not start until December 2014 and will continue to 2019, is paid out in interest-free installments—a boon to Micron, considering that interest payments could have been 5%.

The deal calls for the payments to come from the free cash flow of a restructured Elpida, which will now turn into a Micron subsidiary. If Elpida is not cash-flow positive in its new role as a Micron offspring, then no payments will have to be made by the parent company. By structuring the deal this way, Micron has insulated itself from any drastic downturns in the DRAM market or from being upended by larger macroeconomic events beyond its control.

In a separate but related deal, Micron also purchased Taiwanese maker Powerchip Semiconductor’s minority interest in Rexchip Electronics, in which Elpida had majority two-thirds share. The deal for $330m gives Micron an overwhelming 89% ownership share of Rexchip, which has a cost competitive, leading-edge manufacturing plant in Taiwan.

The Rexchip facility formed a very attractive component of the entire Elpida deal, and Micron’s concurrent purchase of both Elpida and Rexchip gives Micron an even stronger edge in the tightly held DRAM space.

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