Memory-maker Micron
At a purchase price of about $800 million, or 0.5925 shares of Micron in exchange for each Lexar share, Lexar may look small and almost insignificant. Its new parent company sports a market cap north of $10 billion, with almost $5 billion in 2005 sales, making it one of the largest semiconductor businesses around.
But Lexar gives Micron a much-needed retail arm, which in turn provides a guaranteed outlet for the company's Flash memory chips -- even if its current industrial customers switch to Infineon
The mere threat of diverting chip capacity to fuel Lexar's lines of consumer electronics could be enough to give Micron some pricing power. Expanding top-line margins that way should be more than enough to counteract the negative net margins Lexar drags in the door, and would give the company some much-needed breathing room at the top.
Micron's gross margins have been suffering since the mid '90s, only occasionally topping 25%, and giving the company little room to maneuver. Still, management has found ways to squeeze cash out of the dry rocks they've been handed, turning a small net profit in each of the past two years. That sort of fiscal discipline, coupled with more pricing power and a few new revenue streams, could mean significantly better overall results in the coming quarters.
I'm not saying that Micron will miraculously raise gross and net margins to the levels of Qualcomm
I can see why Micron was so eager to close this deal -- and willing to sweeten its original bid by more than 5%, ultimately paying a roughly 13% premium to Lexar's current enterprise value. With large investors like Carl Icahn holding out for more money, and Micron growing impatient to close the deal, I almost expected shareholders to reject this offer and wait for a higher bid. The successful deal was certainly a better outcome for both companies in the long run.
With the deal complete, Micron needs to get the combined operation up and running as soon as possible, renegotiate a few memory-supplier agreements, and start building an electronics supplier with nuts-and-bolts expertise and unlimited component supply. I'll keep a close eye on how it works out; personally, I think we'll see some good numbers out of Micron this holiday season.
Further Foolishness worth remembering:
- SanDisk is down, but not out
- Flash memory is a hot commodity these days...
- ...in multiple flavors, no less.
- How to ride technology to a triple
David Gardner and his team of cutting-edge Fools keep tabs on the latest high-tech developments in their quest for the next ultimate growth stock. Join the hunt with a free 30-day guest pass to Motley Fool Rule Breakers.
Fool contributor Anders Bylund owns none of the stocks mentioned, or Foolish disclosure rules would make him tell you about it. He could certainly use some extra memory, though.