Who wants Elpida and why? Analysts weigh in

The extraordinary auction for bankrupt Japanese DRAM supplier Elpida Memory Inc is well underway.

The deadline for the second round of bidding reportedly occurred last Friday (April 6), with Micron Technology Inc, SK-Hynix Inc, and a joint bid from a Chinese investment firm and a US private equity firm reportedly the remaining bidders. Toshiba Corp, which reportedly submitted a preliminary bid, has apparently bowed out, according to reports.

The value of Elpida, which has been hemoraging money in recent quarters, is unclear. It's even more unclear the value of the firm in its current state of bankruptcy, a development that surprised many in the chip industry.

EE Times approached several prominent memory chip analysts and asked for their thoughts on who wants Elpida, why, and what impact the Elpida situation is likely to have on the DRAM business.

IHS iSuppli

Of the handful of companies pursuing Elpida, Micron probably has the most to gain. Were it to gain control of Elpida's production capacity Micron would likely see its market share nearly double to 20-25 percent and thereby challenge Hynix for the number two spot in DRAM. Micron would also gain access to Elpida's mobile DRAM product portfolio, where it has lagged its competition. It is unlikely that Micron would use all of Elpida's production capacity to make DRAM which would mean the industry would see an overall decrease in capacity—a good thing for all DRAM companies.

Toshiba, upon initial inspection, also stands to gain by buying Elpida. It could expand its domestic manufacturing capacity while bringing in house a strong mobile DRAM product lineup (integral to MCP production). The fact that both companies are also Japanese means that national interests may also be served in this matchup. On closer inspection, however, things look less rosy. Elpida's Hiroshima fab is trailing Toshiba's fabs and would require significant investment to get up to speed. Meanwhile, the lack of mobile DRAM hasn't significantly impacted Toshiba's NAND strategy thus far. From a cultural perspective, while both companies may be Japanese, there exist significant differences between the two and getting them to coexist presents real challenges. It was just ten years ago that Toshiba exited the DRAM business—it will likely require government pressure for them to get back in the game.

Hynix is a potential suitor, but stands to gain less than either Micron or Toshiba. It doesn't operate fabs in Taiwan or Japan (Elpida has operations in both countries while Micron has production in Taiwan and Toshiba in Japan) and it does have an excellent mobile DRAM portfolio. Hynix may now have the financial backing of SK Telecom, but its balance sheet is a mess.

While it's also possible that a hedge fund or someone else could buy Elpida, it makes little sense. DRAM is extremely competitive, the challenge for a third party to return Elpida to profitability would be extremely difficult.

In a logical world Micron would consolidate Elpida. Unfortunately (especially for prognosticators), DRAM is far from logical.

Semico Research Inc

The DRAM industry has had its ups and downs, to put it mildly. It's clear that companies that diversify intelligently are stronger than those who don't. Elpida has learned that the hard way. Switching some production to higher-margin mobile, server, and consumer DRAM, adding NAND production, and offering foundry services for non-memory products are all smart ways to diversify that have been successfully implemented in recent years.

Elpida's most attractive assets are its wafer capacity (if bought on the cheap) and its mobile DRAM technology and customers. Acquiring Elpida would give another DRAM company more market share to compete against Samsung.

Semico believes that a Micron purchase of Elpida would be a smart move. Micron has a history of acquisitions and joint ventures in the DRAM industry. Micron also has a strong cash position so it is well-suited to successfully close the transaction. The company will gain a larger share of the mobile DRAM market, a small but fast-growing segment.

How would Micron purchasing Elpida affect the market? Samsung currently holds 26 percent of the total DRAM capacity. Inotera is second with 13 percent, then comes Elpida at 12 percent and Micron at 10 percent. If Rexchip's output is included with Elpida's, and half of Inotera's is included with Micron's, then a combined Micron-Elpida company would make up 38 percent of the total worldwide DRAM capacity, handily moving into the capacity lead 12 percentage points ahead of Samsung. Micron-Elpida would have more leverage with its customers as well, so prices could stabilize. Finally, faced with even larger competitors than before, the Taiwanese DRAM companies will have more incentive to finally consolidate as well. Eventually the industry will end up with only a handful of players.

Objective Analysis

No one needs more DRAM capacity.

No one needs to make DRAMs in Japan with the yen at 82.

No one needs the tool set that Elpida has, which is thin on ASML immersion steppers needed to make bleeding edge DRAMs—and those are mostly in Taiwan at Rexchip.

Elpida's strength and value is its experienced people, IP for DRAMs (all of DRAM IP of NEC, Hitachi, Mitsubishi) and majority 64 percent ownership of Rexchip in Taiwan. Maybe they have a nice market position with Japanese DRAM buyers too, which can also be serviced from Taiwan or Korea.

Micron might buy Elpida, but they have screwed up most other acquisitions, especially Inotera and Toshiba/Manassas. Hynix has converted a dual NAND DRAM factory in Wuxi to all NAND just recently, and probably does not need Japan, more DRAM production, or more headaches "merging two cultures."

Elpida is the final Japanese chapter in a remarkable period in the history of the semiconductor business. The DRAM industry, caught up in the hurricanes of technical change and huge economic plate tectonics, sees its final Japanese representative about to go under for the last time. It is a time of the passing of an era, and of great sadness. I will hold my Kirin (Sapporo) high, in their honor.

Forward Insights

For Micron, it's an opportunity to obtain wafer capacity on the cheap as well as strengthen its mobile DRAM business where it is relatively weak. Toshiba, which exited the DRAM business in 2001, is not particularly interested to returning to the commodity business. It's primary focus is in the mobile DRAM, which it can package together with NAND in an MCP as a total solution for mobile applications.

The reasons for SK Hynix's interest are less clear. An Elpida acquisition would help it close the gap against Samsung in DRAM, however, its participation in the bidding may be just a way to raise the price any successful bidder will have to pay.

As this is a business where scale and heavy capex investments are required, it would be difficult for private equity firms TPG and Hony to extract any financial value. Hony is affiliated with Lenovo to which Elpida is a major DRAM supplier. Its primary interest would be to ensure continuity of supply.

Ultimately, a Micron acquisition, potentially with participation of the Formosa Plastics Group or a joint SK Hynix-Toshiba acquisition would be the most likely outcomes.

Either outcome would be positive for the DRAM market as the acquirer would have to transition production facilities to a common technology platform effectively constraining output for nine to 12 months.

This story was originally posted by EE Times.