December 18, 2001 2:10 PM PST
Micron-Toshiba deal breaks DRAM wide open
The Nampa, Idaho-based DRAM (dynamic random access memory) manufacturer announced on Tuesday that it has inked a deal to acquire Toshiba's Dominion Semiconductor subsidiary. Dominion, located in Manassas, Va., is the sixth-largest maker of DRAM for use in PCs and other computing devices.
Assuming the deal goes through, Micron would likely assume the top spot over Korea-based rival Samsung in both shipments and revenues. The last U.S. manufacturer to sit at No. 1 was Intel, which left the memory business in the mid-1980s.
Semico Research shows that Samsung was the top DRAM maker in 2000, with 23 percent of the market. Micron followed at No. 2 with 21 percent. Hyundai (now Hynix Semiconductor) was No. 3 with 19 percent. Fourth-place Toshiba had 7 percent of the market. Semico's 2001 numbers are not finalized yet.
"If (Micron was) to acquire the Toshiba business, they would be ahead in both dollars and bits," said Andrew Norwood, senior analyst with Dataquest. "Coming out of this recession, it's a good place to be, of course."
Additionally, the deal would put Micron in the business of manufacturing memory designed by Rambus, a company Micron is suing. Hynix Semiconductor, the struggling Korean giant, could also be affected. It has been trying to negotiate a merger or a strategic investment with Micron.
German manufacturer Infineon also feels the impact. It was negotiating to buy Toshiba's DRAM business.
DRAM prices: Up or down?
For consumers, the effect of the deal is tough to gauge. The buyout could prompt memory prices to rise if Micron chooses to slow down production of standard DRAM to dry up capacity or to shift resources to concentrate on higher-priced products such as DDR DRAM (double data rate DRAM).
Then again, Micron is the lowest-cost memory manufacturer in the world, according to, among others, Eric Ross at Thomas Weisel Partners. With new capacity, Micron could use its established techniques to gain market share, eke out a profit, and undercut competitors as time goes on without consumers noticing. A similar deal with Texas Instruments a few years ago vaulted Micron out of the pack and into the No. 2 spot in the industry. Memory prices have continued to decline since then, but Micron has performed better financially than most competitors.
Memory makers are suffering through some of their darkest times in recent years. Severe price declines resulting from excess factory capacity and slowing PC demand have forced many to sell products below cost. Most are losing money, and consolidation through acquisitions has been seen as inevitable.
In July 2000, for example, 128MB SDRAM chips sold for $18.40 on the spot market. Now the same chips sell for $1.86, and that's on an upswing.
Sherry Garber, a vice president at Semico Research, described the deal as a win for Micron, but just one of what will become several moves toward industry consolidation.
"Prices have stabilized in the last month," she said. "But we really need the economy to recover a little more to see an increase. Demand has to go up...before prices go up."
Consumers "have been getting something for nothing for the last year," Norwood said.
As Garber mentioned, DRAM prices have recovered in recent weeks, but for the market to recuperate fully, analysts said, overall production capacity must be lowered. How the Dominion deal will affect capacity is uncertain.
Micron said it will continue to make memory at the Dominion plant and will refurbish it--once the recession fades--to match the processes found in Micron's other plants. If the downturn continues, however, Micron could resort to a closure, the company said.
Micron doesn't necessarily need any extra manufacturing capacity at this very moment, analysts said, in light of the ailing status of the DRAM market. In fact, the company has already slowed its plans to expand capacity, sitting on its as-yet-uncompleted 300mm DRAM factory in Lehi, Utah.
With the Dominion deal, Micron is looking ahead to times when it will need the new fabrication facility, or fab, to meet demand. Because DRAM prices have increased in recent weeks, and chipmakers Intel and Advanced Micro Devices have raised fourth-quarter forecasts as a result of better-than-expected demand, DRAM makers are hopeful that a turnaround has begun. Even if the turnaround takes time, Micron is gaining valuable capacity, and sooner or later, the company will need it.
"Eventually they will," said Risto Puhaka, a vice president at VLSI Research. "Eventually this recession will turn around. It's much better to do (this kind of deal) right now than when the market is at its peak."
Indeed, according to Micron spokesman Sean Mahoney, the impetus for the deal was that it provided an inexpensive route to more real estate. Mahoney said his company plans to convert the Dominion fab to its own manufacturing technology when the market swings upward again. Getting market share was a secondary consideration.
"Market share is not really a goal of ours; it's a byproduct," Mahoney said.
Financial details on the transaction have not been disclosed, although history, and current construction costs, indicate the company got a bargain. Building the Virginia facility would cost close to $2 billion, according to various industry estimates.
In the Texas Instruments deal in 1998, Micron obtained several manufacturing facilities from TI, which also provided $750 million in financing to overhaul them. In exchange, TI got Micron stock, which it has sold, according to a Micron representative.
But what of Hynix Semiconductor? Micron's potential acquisition of Toshiba also raises a few questions there, analysts said.
Micron has been in discussions to form an alliance with Hynix, the No. 3 DRAM maker. Mahoney said those discussions are ongoing, and a deal is "still possible."
"They wanted to show Hynix that they could do other things," said Joe Osha, an analyst at Merrill Lynch. A deal with Hynix could still take place and would have larger significance because of Hynix's larger market share. Consolidation on that scale could also begin to push prices up, depending again on the circumstances.
Such an alliance would make Micron the undisputed No. 1 DRAM maker in the world.
Another interesting wrinkle has to do with Rambus. Toshiba has been a Rambus RDRAM manufacturer for the last year to 18 months, analysts said. The company is also said to have the best licensing terms with Rambus.
But Micron has been locked in a legal battle with Rambus over DRAM patents for the past year or more. Furthermore, the company has stated its preference for DDR SDRAM over RDRAM on several occasions.
But because of its plans to continue Dominion's operations, Micron will manufacture RDRAM chips for a time. Analysts said that owing to RDRAM's higher price--long a source of criticism--the memory technology is also more profitable than other DRAM-based memory types.
Toshiba America Electronics' Memory Business Update will lay off about 2,000 people worldwide as part of Toshiba's earlier announced staff cuts. But it hopes about 1,400 of them will be able to transfer to Micron. It will also refurbish a fab in Japan to make chips other than DRAM, the company said.
News.com's Michael Kanellos contributed to this report.