Last week, flash memory specialist SanDisk (UNKNOWN:SNDK.DL) soared on a Bloomberg report that the company has hired a bank to help it explore a potential sale. This comes as the storage sector has fallen on hard times in 2015, following a broad sector rally in 2013 and 2014. During those two years, SanDisk gained 125% while peer players like Micron (NASDAQ:MU) rallied over 450%. Prior to last week's pop, SanDisk shares were down 37% year to date for 2015. The report also comes as the semiconductor industry has seen unprecedented consolidation, with new mergers and acquisitions being announced seemingly every week.
Micron is one of the rivals that is said to be considering putting in an offer, which would make some sense although could be tricky to consummate. SanDisk jointly operates flash memory factories with Toshiba, so Toshiba would have to sign off as well. But the good news is that Toshiba is reportedly open to the idea. Western Digital is the other company that is probably interested. There are a whole lot of ways this could play out.
But then, B. Riley analyst Craig Ellis suggested that maybe Apple (NASDAQ:AAPL) should swoop down and scoop up SanDisk. Not this again.
Stop me if you've heard this one before
Every time some type of speculation of Apple acquiring a major company comes up, I can't help but roll my eyes. The reasoning is always remarkably shallow and is oftentimes predicated on one fact: Apple has a stupid amount of cash.
Then the speculator usually makes some basic argument for how the target company's business would fit within Apple's organization, and cites Apple's love of vertical integration. Expectedly, Ellis says, "For Apple, it's a drop in the $115 billion in (its) net-cash-and-investments bucket." The analyst believes the "pay out" would be rather quick and manifest itself in the form of lower NAND costs along with negotiating leverage with other suppliers.
Every time some type of speculation of Apple acquiring a major company comes up, I can't help but shoot it down. Analysts that suggest these ideas are invariably unfamiliar with Apple's actual acquisition strategy. The Mac maker almost always quietly acquires small companies with innovative technology that it can integrate into future products.
The Beats deal was so peculiar not only because it didn't really fit this characterization, but also because it was six times larger than any prior Apple acquisition. And that was $3 billion. SanDisk's current market cap is currently over $14 billion.
It makes a lot more sense for a peer to acquire SanDisk since operational similarities would yield significant cost-saving synergies. Considering the commodity nature of the memory market, cost discipline is almost as important to long-term viability than product innovation. If there are multiple suitors, a potential bidding war could conceivably drive SanDisk's final price to close to $20 billion. That total would be almost seven times the size of the Beats deal.
Besides, SanDisk supposedly lost Apple's SSD business to Samsung earlier this year, so clearly Apple prefers other companies' products over SanDisk's right now, although this is a highly cyclical industry that we're talking about.
The memory business is decidedly not the type of market that Apple has any interest in entering either. Apple prefers markets where product innovation is the primary source of pricing power, and it has little to no interest in operating its own manufacturing facilities most of the time.
Apple would rather spend that money investing in itself through its share repurchase program.