How Big Can a Micron Get?

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The consolidation of the computer memory market continues.

Micron Technology (NYSE: MU  ) is buying fellow memory maker Numonyx for about $1.3 billion in Micron stock. That's about 17% dilution for Micron's shareholders, and early reactions to the move are running on the negative side. Micron shares fell 6% in yesterday's trading.

Numonyx is the combination of the former memory chip divisions from Intel (Nasdaq: INTC  ) and STMicroelectronics (NYSE: STM  ) , formed two years ago with tech incubation firm Francisco Partners. Since Micron's deal values Numonyx at about $1.27 billion, and the original spinoff was valued at $2.7 billion, those three partners got a negative 47% return on their investment after Numonyx's creation in March 2008.

The acquisition of Numonyx adds scale and manufacturing capacity to Micron, and also boosts the company's profile in the flash memory space, which gives Idaho's greatest technologist a better chance of competing with global giants such as Samsung and Toshiba. More importantly, the deal continues a trend of consolidation that is good for the memory industry as a whole.

Years of oversupply and limited demand caused a brutal price war, which now is officially over, thanks to a rebound in end-user demand and disciplined manufacturing tactics. Samsung nearly bought SanDisk (Nasdaq: SNDK  ) to get a hold of the company's flash memory expertise and American sales force and retail presence; a gaggle of Taiwanese memory makers joined forces under the guidance of Japanese rival Elpida; and an avalanche of bankruptcies have sped up the process considerably.

And that's exactly what the memory sector needed. Micron, SanDisk, and Rambus (Nasdaq: RMBS  ) have all seen their share prices more than double in the last year, utterly crushing the S&P 500. Micron investors can thank flash memory consumers such as Apple (Nasdaq: AAPL  ) for some of these gains, but kudos also go out to the remaining giants of the market itself and their newfound discipline.

Is Micron's rocket ride to the stars over, or will the Numonyx deal refuel the ship? I think there's plenty of gas left in the tank, and plenty of All-Star CAPS players have weighed in with the same sentiment in the last couple of weeks. What do you think? Click over to CAPS and cast your vote for Micron's chances to keep beating the market -- yea or nay. It's fun, free, and enlightening all at once.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Intel is a Motley Fool Inside Value recommendation. Apple is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletter services free for 30 days. You can check out Anders' holdings and a concise bio if you like. The Motley Fool is investors writing for investors.

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