SAN FRANCISCO (MarketWatch) -- Shares of SanDisk Corp. jumped more than 30% Friday after Samsung Electronics Co., the world's largest producer of flash-memory chips, said it is considering buying the U.S. chipmaker.
If completed, such a merger could alter the dynamics in the memory-chip industry, which has been reeling from a market glut that has led to a steady decline in prices and sales.
South Korea's Samsung
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, , ) made the announcement in a statement to regulators, saying that it would report any future concrete developments toward a deal.
"We are exploring all options, including a buyout and an alliance, but nothing has been decided at this time," according to the company.
The statement triggered a rally that pushed SanDisk
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, , ) shares up 31% to close at $17.64. The chipmaker's shares have dropped more than 45% since the beginning of the year as the industry reeled from a market glut that has pulled down average selling prices.
Read MarketWatch First Take Commentary. The announcement led Caris & Co. analyst Betsy Van Hees to upgrade the company's rating to average from below average, saying that an acquisition would provide "significant benefits" to the "beleaguered" SanDisk as it suffers through an "unprecedented NAND downturn."
Analysts said an acquisition could help Samsung cut the amount of royalties it pays to SanDisk and give it other advantages in tightening control over the flash memory market.
Samsung pays SanDisk up to $500 million annually in royalties relating to flash-memory patents, according to Lehman Brothers.
"As SanDisk's market cap is just around $3 billion, we believe this reason itself could serve as an acquisition merit for Samsung," C.W. Chung, Lehman vice president of Asia technology, wrote in a note Friday.
'We may take this type of M&A activity as a signal of the nearing the memory bottom.'
— C.W. Chung, Lehman
He said that the acquisition also bodes well for an industry hammered by falling prices and stiff competition. "If Samsung succeeds in acquiring SanDisk at a reasonable price, we believe this will be positive for both the overall memory market as well as for Samsung Electronics. We may take this type of M&A activity as a signal of the nearing the memory bottom, as industry consolidation is typical of previous bottoms for the memory market," Chung said.
Rings a bell
However, a deal with Samsung does not appear to make much strategic or economic sense, countered analyst Daniel Berenbaum of Cowen & Co., who said there was similar speculation recently of a SanDisk buyout by Seagate Technology
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"We're not sure why Samsung needs SanDisk -- it's also not clear that SanDisk is a willing seller," Berenbaum wrote in a note.
He also said that Samsung has "limited experience in large acquisitions, particularly foreign ones."
Analyst Mario Morales of International Data Corp. also noted that Samsung "is not a company that acquires companies. They focus on organic growth."
However, he added, SanDisk's well-regarded NAND flash technology and the company's currently low valuation have made it an attractive acquisition target.
Still, some analysts cited a major stumbling block to any Samsung: SanDisk's joint venture agreement with Toshiba.
"There could be a change of control provision in the joint-venture agreement that stipulates that Toshiba has to be compensated if the ownership structure of the joint venture were to change," wrote Goldman Sachs analyst James Covello.