Digital display technologist Universal Display (OLED 1.65%) renewed a long-standing contract with top customer Samsung (SSNL.F -28.74%) this week. These partners are getting so inseparable, you'd think the larger business might want to simply buy the smaller one.
So let's imagine that Samsung Display launched a buyout bid for Universal Display right now, instead of simply extending their existing deal for five years. What would that look like?
The story so far
This week's contract runs until the end of 2027, with an optional two-year extension at the end. The previous five-year agreement was set to expire at the end of December, also with a potential two-year extension to follow. The companies signed a similar deal in 2011 and before that in 2005. In other words, the organizations have a long and stable history together.
As before, the current deal allows Samsung to make use of Universal Display's patented technology to develop and manufacture screens with organic light-emitting diode (OLED) technology. It also sets Universal Display up as the exclusive supplier of the necessary chemicals. Experienced investors know that Universal Display serves as a middleman in the materials pipeline, relying on the manufacturing expertise of another longtime partner, PPG Industries (PPG 0.07%).
The first document in the string of Samsung deals above kick-started the commercial market for OLED displays. In 2010, Samsung shipped the Galaxy S1 smartphone, an early Android device featuring an OLED screen. These beautiful, power-sipping screens worked their way down from high-end flagship devices and are now found in mass-market phones like the Samsung Galaxy A33 5G or my OnePlus Nord N200 5G. Apple (AAPL 1.27%) embraced OLED screens with the iPhone X in 2017, and you can pick a used one up on the cheap nowadays.
The same story is playing out in other markets at this point, led by large-screen TV sets and followed by screens for laptop and desktop computers.
In every case, Universal Display serves as the technology researcher while many partners -- including and led by Samsung Display -- run the manufacturing facilities. Universal Display's contracts base their royalty payments and material purchase agreements on the total area of the OLED screens manufactured and delivered to device builders.
Samsung might want to sweeten its own OLED pipeline by taking control of the leading developer of viable OLED screen technologies. Doing so could lower Samsung's OLED manufacturing costs, give the company early access to newly developed technologies, and control technology access to rivals such as LG Display (LPL 1.00%), Japan Display, and AU Optronics. These companies are investing billions of dollars in OLED manufacturing facilities as we speak.
Roadblocks and deal breakers
Samsung's opportunity to place a Universal Display bid may have passed already. The target company's stock is down 30% in 2022, but it's still a substantial business with a $5.3 billion market cap. Samsung Display controlled assets worth 58.2 trillion Korean won (approximately $45.8 billion) at the end of September. That's a 23% portion of the Samsung Electronics mothership's total assets. In turn, the whole Samsung company held cash equivalents of 44.5 trillion won ($35.1 billion). Assuming that Samsung Display's cash access is similar in proportion to its share of the parent company's total assets, that would put the screen builder's cash reserves in the neighborhood of $8.0 billion.
A Universal Display buyout would sap those cash reserves in a hurry, especially since takeovers typically include a buyout premium. You have to inspire shareholders to vote in favor of the deal, after all. So the buyout idea would need to get around this massive speed bump first. A stock-swap deal structure might work, but then Samsung shareholders might vote that idea down due to the dilutive effect that solution would have on their Samsung stock holdings.
So a deal looks unlikely from a purely financial point of view. And that's not even the biggest problem. You see, regulators around the world would work together to stop Samsung from controlling the OLED technology market singlehandedly. Critics would point to antitrust concerns and the potential for unfair business practices when every part of the OLED screen business can be managed under Samsung's roof alone. No regulator in their right mind would allow that kind of deal, no matter what the two companies' shareholders might say.
This is all for the best, anyway
Long story short, it'll be a cold day in Miami before Samsung considers a Universal Display buyout. It's just not a realistic idea, chiefly for the two key reasons listed above.
And that's all right by me. As a longtime Universal Display shareholder, I prefer to see the company continuing as a stand-alone business with much greater prospects for percentage-based growth in the long run. Samsung is a fine investment in its own right, but with a radically different profile than Universal Display. Larger companies are more stable than their smaller brethren, but they also deliver slower top-line growth over time.
I would suggest grabbing a few Universal Display shares while the price is right. Let Samsung sharpen its pencils in preparation for another contract renewal in 2027. By then, computer screens and TV sets will have made OLED devices even more mainstream than they are today, and Universal Display will have grown harder and harder to acquire along the way.
