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Dissecting the Micron-Elpida merger

Posted: 17 Feb 2012 ?? ?Print Version ?Bookmark and Share

Keywords:Micron-Elpida merger? DRAM? DRAM manufacturing?

Talks of a Micron-Elpida merger have been circulating the past few weeks. Although neither company has acknowledged any negotiation discussions between them, the possible merger between Micron Technology Inc. and Elpida Memory Inc. would dramatically change the playing field of the DRAM market.

If the merger pushes through, there will be a new No. 2 player that could give South Korea's Samsung Electronics Co. Ltd a run for its money, according to IHS iSuppli.

Elpida has been struggling. Not only is it bogged down by debt, but the company has also posted five consecutive quarterly losses.

According to IHS, a merged Micron and Elpida would have capacity for 374,000 DRAM wafer starts per month. The combined company would have a 28 percent share of worldwide DRAM manufacturing capacity, placing it just behind Samsung, which has capacity for 433,000 wafer starts per month, or 33 percent of global DRAM capacity.

On their own, Elpida and Micron typically rank third and fourth in DRAM capacity, respectively, IHS said.

The reconfigured DRAM terrain also would mean that South Korea's Hynix Semiconductor Inc. would fall to third place with 23 percent share of DRAM capacity, or about 300,000 DRAM starts per month, IHS said.

Potential DRAM landscape

The table and graph show how much the Micron-Elpida merger will affect the other players of the DRAM industry.

Mike Howard, senior principal analyst for DRAM and memory at IHS, said that a combined Micron-Elpida would provide Samsung with its most powerful rival yet in DRAM. "Samsung is usually 10 percentage points ahead of its next competitor, but the merger would trim its formidable market share lead by half, to 5 percentage points," Howard said.

Howard said any proposed merger or other tie-up arrangement between Micron and Elpida would face several challenges, not the least of which is Elpida's debt load. At the end of the third quarter last year, Elpida owed $4 billion in outstanding obligations, he said. While the DRAM industry is familiar with large amounts of debt because fabs can be extremely expensive to build and often require debt to finance, Micron is decidedly debt averse, he added.

The strong Japanese yen and Micron's ongoing partnership with Taiwan's Nanya Technology Corp. could also be obstacles to a possible Micron-Elpida deal, Howard said. The death of former Micron Chairman and CEO Steve Appleton on February 3 could also complicate matters, since Appleton was a known advocate for consolidation and was likely a driver behind any possible deal, IHS said.

But a merger between the two companies would also offer several benefits in addition to combined manufacturing capacity, IHS said. For Elpida, a deal would provide access to the premium customer segments that Micron serves. IHS noted that in the third quarter of 2011 Elpida's average selling price for DRAM was 70 cents per gigabyte, compared with $1.34 per gigabyte for Micron, a differential that IHS attributed to the firms serving different customer groups.

A deal would also give Micron greater access to Elpida's mobile DRAM buyers, IHS said. Elpida shipped 18.4 percent of mobile bits in the third quarter, compared to only 5.3 percent for Micron, the firm said, adding that mobile DRAM now accounts for about 15 percent of the total DRAM market.

For customers of both Micron and Elpida, a merger between the firms could be a double-edged sword, IHS said. A merger would mean one less DRAM supplier on the market, which could enable DRAM prices to firm, IHS said. But a merger could also provide ballast against the overwhelming size and influence of Samsung, IHS said.

Overall, the benefits of a more stable market resulting from the merger probably would outweigh the drawbacks of having one less supplier, Howard said.

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