With the purchase of Elpida Memory, the third-largest DRAM maker, Micron Technology not only becomes a Tier 1 supplier, but also catapults itself into the mobile space as a supplier to leading smartphone and tablet makers, including Apple.
"It's a significant improvement for [Micron]," said Mike Howard, an analyst for industry research firm IHS iSuppli. "They were a tier-two player when it came to mobile. They had a tough time getting designed [into products]."
Elpida is a major supplier of DRAM to Apple, the world's largest consumer of semiconductor technology. Micron's purchase of Elpida will help to stabilize Elpida financially and will likely lead to its shoring up that component-supplier relationship.
Elpida mainly manufactures DRAM for smartphones and tablets, while Micron is a provider of enterprise-class DRAM and NAND flash for networking, servers and storage systems.
Micron still has major competitors in the DRAM space in Samsung and Hynix. Samsung has a 40% market share and Hynix has about 23%, according to IHS iSuppli. Once the acquisition deal closes, Micron will leap from a 12% to 13% DRAM market share to about 22% or 23%, Howard said.
Micron made a failed attempt to acquire Hynix in 2002. Like Elpida, Hynix had been suffering financially after chip prices plummeted.
DRAM pricing has been on the upswing in recent months, after suffering major losses due to oversupplies last year. The market has become markedly less volatile since Elpida's February bankruptcy filing, IHS iSuppli stated in a recent report.
"With things still very much up in the air on how events will unfold, industry participants seem to be waiting for some indication of what the resulting industry structure will be like after an Elpida takeover is finalized," said Dee Nguyen, a memory analyst at IHS iSuppli. "As a result, the current pricing environment appears to reflect this mood with the DRAM market eerily quiet, accompanied by visibly less pricing volatility atypical of the industry."
Micron announced that it is acquiring Elpida for $750 million and will also take over $1.75 billion in Elpida's debt. Elpida filed for chapter 15 bankruptcy in February. Micron's deal with Elpida states that the debt payoff will be supplied by Elpida's own subsidiary. That, Howard said, makes the financial terms of the deal "very smart."
Micron is paying the $1.75 billion of debt over seven years, but the debt payments are tied to cash flow from Rexchip, a joint venture between Taiwan-based Powerchip Technology and Elpida.
"If [Rexchip] doesn't perform financially, Micron doesn't have to pay down the debt," Howard said. "If the market takes a turn, they're going to be insulated. I think they're getting a really good deal."
The acquisition will immediately double Micron's DRAM wafer production. Elpida has a fabrication facility for 300-millimeter DRAM in Hiroshima, Japan, and Rexchip runs a 300mm DRAM fabrication facility in Taiwan, and an assembly and test plant in Akita, Japan.
The fabrication assets of Elpida and Rexchip together can produce more than 200,000 300mm wafers per month. The cost to build fabrication facilities to produce 200,000 chips a month would be considerably more than what Micron is paying for Elpida and Rexchip, Howard said.
Jim Handy, director of research firm Objective Analysis, said that with DRAM marketplace revenues growing at rate of about 5% year over year, Micron could not have afforded to build a new fabrication facility. The buyout was the best method of immediately increasing its market share. The cost of constructing a fabrication facility is going up 12% every year, Handy said.
"They're getting good-quality production capacity for pennies on the dollar. There are a lot of synergies between the two companies, and Elpida brings a lot of good technology to Micron," he said.
Integration challenges
"They've got a major challenge with integration," Howard said. "Once they close this deal, they'll start to try to push customers over from an Elpida design to a Micron design. I think they'll get 95% of the way there in six to 12 months. The other challenge is they need to implement Micron's technology in Elpida's fabs. That can be a very difficult process."
The latest buyout is not the first time Micron has dealt with integrating another company's fabrication facilities. In the past, Micron has struggled to do so.
For example, in 2001, Micron purchased Toshiba's fabrication facilities in Manassas, Va., and struggled to get them online. Then, in 2008, Micron acquired a 35.5% stake in Inotera Memories from Qimonda AG, acquiring wafer foundries in Taiwan. It again struggled for the better part of two years to integrate them and bring them up to speed, the analysts said.
Micron lost about $500 million in potential revenue during that time because it couldn't get production online when the DRAM market was at its peak, Handy said. "Hopefully, this integration will go better than some of their past attempts."
Critical to Micron's integration success will be "disentangling themselves" from Powerchip Technology, the other joint owner of Rexchip.
"I think it's going to take at least a year to get the fab transition in place. During that time, they'll be running Elpida designs just because they can't convert that fab all at once," Howard said. "Then they can operate as they want to with that entire Rexchip fabrication facility. That really is one of the jewels of this deal. It's producing in Taiwan where Micron already has boots on the ground."
