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Samsung Drops $5.85 Billion Bid For SanDisk

Growing uncertainty in the flash memory maker's business and its deteriorating finances were reasons Samsung said it was pulling out of the deal.

Samsung Electronics on Wednesday dropped its $5.85 billion offer for SanDisk, saying the company was no longer worth the money because of the growing uncertainty in the flash memory maker's business and its deteriorating finances.

Samsung notified the SanDisk board of its decision in a letter sent two days after the latter company reported a wider-than-expected quarterly loss and said it would slash costs and sell some equipment to manufacturing partner Toshiba in order to bolster its finances. The dismal performance sent SanDisk shares well below Samsung's offer of $26 a share.

In the letter, Yoon Woo Lee, vice chairman and chief executive of South Korea-based Samsung, said he was "disappointed" the two companies couldn't reach an agreement, but said Samsung had to "squarely face the growing uncertainties in [SanDisk's] business, which may continue to deteriorate in this difficult economic environment and further impact your standalone value.

"Your recently announced third quarter results serve only to illustrate this risk," Lee said. "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 standalone basis as well as to Samsung."

In response, SanDisk, based in Milpitas, Calif., issued a statement saying that it had been open to a deal with Samsung, but found the original offer too low.

"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," the company said. "We believe this raises questions about the real motivations behind Samsung's offer."

Following Samsung's announcement, SanDisk shares were down by almost a third to just over $10 in afternoon trading on the Nasdaq. SanDisk shares have lost well over half their value this year.

"I do think that Samsung comes out the winner and SanDisk comes out the loser," Joseph Unsworth, analyst for Gartner, said of Samsung's decision.

Toshiba, Samsung's biggest competitor, has had to pay $1 billion to bail out SanDisk by buying its equipment at a time when flash memory prices are falling due to an oversupply of chips. SanDisk has also accumulated a lot of debt as a result of spending on manufacturing facilities and research and development. "They were very aggressive earlier in the year, and because demand has fallen, they are in a very difficult situation," Unsworth told InformationWeek.

Unsworth believes SanDisk can ride out the downturn, but a recovery is unlikely to begin until late in the second quarter of next year, when Gartner expects flash memory prices to improve.

Following SanDisk's quarterly results, analysts said it was unlikely Samsung would be willing to pay $26 a share. Samsung is the world's largest supplier of flash memory chips, and SanDisk is the world's leading supplier of memory cards that use the chips.

Samsung pays SanDisk hundreds of millions of dollars a year in royalties for use of certain memory patents. The two companies are in the process of renegotiating the licensing agreements, which are up for renewal next August. SanDisk has accused Samsung of trying to buy the company without paying the full value of the patents, according to Reuters news agency.

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