SanDisk is to pay $1.37 billion for Msystems in an all-stock deal that the two companies said would bring together the two leading innovators in the flash storage market.
Kfar Saba, Israel-based Msystems has been vulnerable to a takeover since it became mired in a stock-option probe and had to restate its results going back to 2001. The company is also facing investigation by the SEC.
Coming hard on the heels of Hewlett-Packard’s $4.5 billion cash acquisition of Mercury Interactive, it is clear that the public humiliation of stock-option irregularities, SEC probes, and class action suits from aggrieved shareholders has sapped the will of many boards to fight for independence.
Milpitas, California-based SanDisk, which had revenue of $2.3 billion in 2005 and has been growing almost 40% a quarter, said it was overjoyed at acquiring a company with complementary products, customers, and channels. CEO Eli Harari said the NAND flash data storage business is in its early stages and he believes the market opportunity is largely untapped. He quoted forecasts that the market would grow from $11 billion last year to $40 billion by 2010.
Both companies are about 18 years old and have their roots in Israel. But while SanDisk approached the market from the semiconductor side, Msystems took a more systems approach. Such is the complementary nature of their operations that few synergies are seen in operating costs and Sandisk believes the deal will not be accretive until the end of 2007.
One advantage of the deal for Msystems is that Sandisk has its own source of raw flash though a joint venture with Toshiba, although the company intends to continue to use non-captive sources. In April, Msystems pulled out of a pact with Samsung because it believed Samsung had failed to supply it with a steady supply of flash chips. However, with falling prices enabling flash memory to constantly colonize new markets and the ultimate aim being to supply hard drives for use in laptop computers, both companies have their own unique technologies to squeeze more memory out of existing fabs.
In May, Msystems announced its x4 technology, flash management, and control algorithms designed to enable use of four bits per cell of NAND flash. It believed this would accelerate the adoption of high capacity NAND flash in a whole range of products such as MP3 players, digital video cameras, solid state drives in laptop computers, and GPS devices. The company said it was considering several x4 technology partnerships, which it anticipated will lead to commercial introduction of components during 2007.
For its part, Sandisk paid $250 million in 2005 for Matrix Semiconductor, a Santa Clara, California company that had developed 3-D integrated circuits based on one-time programmable technology. This was designed for low-cost storage applications that do not require multiple rewrites such as video games, music, and archiving. SanDisk said it complemented Flash memory, which was rewritable but more costly. Investment in both technologies will continue after the takeover.
SanDisk and Msystems are also 50-50 partners in US LLC, a company developing software that enables USB Flash drives to carry whole applications rather than just data files. It positions the U3 Smart Drive as a standardized platform for the development of apps, enabling users to carry apps and personal preferences and launch software on any Windows-based PC without leaving any information or data on the hosting PC. Indeed, it holds the promise of carrying an entire desktop on a USB stick, as well as serving as a convenient piece of hardware for transporting apps such as Skype.