Updated at 11:40 p.m. with SanDisk response to Samsung letter.
Samsung on Tuesday withdrew its $5.85 billion bid for SanDisk, citing an increasing "risk profile."
This follows a new manufacturing agreement between SanDisk and Toshiba disclosed Monday and a stiff rejection by SanDisk last month of the Samsung offer.
"After nearly six months of efforts to pursue a transaction with no meaningful progress, we are withdrawing our proposal to acquire SanDisk," Yoon Woo Lee, vice chairman and CEO at Samsung Electronics, said in a letter that Samsung released Wednesday in Seoul.
"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," he said. "Had we been able to execute on our proposal, your shareholders would have received full, fair and certain value for their shares."
The latter point in the letter was a bone of contention for SanDisk. SanDisk CEO Eli Harari reiterated Monday that the offer of $26-per-share was far from adequate.
"Samsung significantly undervalues (SanDisk) in light of the value of our IP (Intellectual Property) to Samsung," Harari said. "Samsung stands to gain enormous value from owning our patents and our know-how."
Samsung, in an apparent response to this, said: "We have obligations to our own shareholders...(that) 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."
The letter continues, citing the increased risk of a SanDisk buyout. "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."
SanDisk's Harari did say Monday, however, that he was still open to an offer "at the right price, (with) the right process, and the right protections for SanDisk's shareholders."
Update: SanDisk issued the following statement Tuesday night:
"From the start of this process 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. 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."
Toshiba to the rescue? The Japanese electronics giant may try to stave off a Samsung takeover of SanDisk.
In the aftermath of Samsung's $5.8 billion bid for flash memory supplier SanDisk and SanDisk's unceremonious rejection, Toshiba looms as a large and potentially obstructive factor to a deal.
Toshiba and SanDisk have a partnership dating back to 1999 and operate two joint ventures called Flash Partners and Flash Alliance, as EE Times spelled out this week in an analysis of the dynamics of a possible deal.
SanDisk has a 49.9 percent interest in each of the two joint ventures, which also involves funding research and development expenses.
This means Toshiba is far from just a bystander. "Toshiba will clearly counter," said Avi Cohen, managing partner at Avian Securities, in a research note issued this week.
Cohen listed reasons why the deal could be problematic, including the fact that if Samsung buys half of the joint venture with Toshiba, "a Japanese company will become a junior partner to a Korean company which we think is unlikely." More problematic is that current "raw NAND customers of Samsung would be competing on the finished product side with their only supplier - both untenable and competitively harmful developments," he wrote.
Japan-based reports also point to possible resistance from Toshiba. The Mainichi Shimbun, one of Japan's largest dailies, cited possible resistance to the deal as it would force Toshiba to re-evaluate its semiconductor strategy.
That's not to say that SanDisk doesn't need help. It is a laggard in the growing market for solid-state drives--where Samsung is currently the leader--and has been caught in a brutal downward spiral of flash memory prices.
As SanDisk's profits have been squeezed, its stock has plunged over $60 per share over the last two years.
All this makes for a vulnerable takeover target. SanDisk's chairman and CEO, Eli Harari, said earlier this week that the $26-a-share bid from Samsung was "opportunistically timed at the trough of an industry-wide downturn."
Samsung will not go away anytime soon, however. Indirectly, it has a large stake in SanDisk. Samsung pays more than $400 million annually to use SanDisk's flash memory patents, dwarfing payments by any other company.
Some analysts also believe that SanDisk can't afford to reject an offer from Samsung in a down market, according to a Reuters report.
On the other hand, other factors working against the deal include objections from regulators because of the overwhelming market share (almost 50 percent) the combined entity would have, according to Cohen.
Samsung is the second largest chipmaker in the world behind Intel, and the largest supplier of flash memory.
Updated at 5:00 p.m. with closing share price.
SanDisk for Sale? The stock price says so.
The world's largest maker of flash memory cards for digital cameras jumped 31 percent, or 4.18 points, Friday on rumors that Samsung would buy the company.
This follows a recent spate of rumors including one that said Seagate was interested in SanDisk. While Samsung already makes flash memory and is a leader in the emerging solid state drive market, Seagate does not sell SSDs and is looking to get into the market.
Samsung doesn't need SanDisk to grow; the South Korean company is already the world's largest supplier of flash memory chips, with Toshiba a distant second.
Some analysts find a buyout improbable. "We find it highly unlikely that Samsung would be allowed to buy SanDisk," said Avi Cohen, managing partner at Avian Securities. "It would be a great coup if they managed to pull this off because they would have a huge competitive advantage if they do," he said.
"Unfortunately, there's far too many regulators and the market share would be far too high," he added.
Cohen said that Samsung currently has a 40 percent share of the flash market. This would jump considerably with a SanDisk buyout.
Samsung pays more than $400 million annually to use SanDisk's flash memory patents, according to Bloomberg, citing a report from Lehman Brothers. So saving money in that area could possibly be a motive behind a Samsung buyout, Bloomberg said.
Moreover, the market has become much more competitive in the last month. Chip behemoth Intel got into the solid state drive market in August, as did Micron Technology.
And pricing for flash memory chips in 2008 has been brutal. Prices have been dropping precipitously, diving more than 50 percent.
A Samsung buyout of SanDisk would have other repercussions. Toshiba and SanDisk now cooperate closely in the manufacture of flash memory and jointly fund some flash plants in Japan. Untangling this relationship would ostensibly be complicated.
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