Shares of Micron Technology (NASDAQ:MU) jumped as much as 14.9% higher this morning, driven by fresh buyout rumors. Is Micron going anywhere, and what should current shareholders do about it?
First, let's examine the news. Independent reports from Reuters, Financial Times, and The Wall Street Journal -- each outlet backed by a supposedly unique set of anonymous insider sources -- all describe very similar terms.
Chinese technology conglomerate Tsinghua Unigroup is kicking Micron's tires in preparation for the largest American buyout in Chinese history. The offer would land at $21 per share, which works out to a market value of $22.5 billion. The total price tag would be a little bit higher, since Micron carries about $2.7 billion more debt than cash on its balance sheet. It's like buying a wallet with a binding IOU inside.
Since Tsinghua is a private company, operating as part of an even larger private company, all under the wing of the Chinese government, it's hard to say whether this will strain the buyer's finances. There are many layers to this veritable onion of secrecy.
But Micron is profitable both on the bottom line and in terms of cash flow, so the Chinese aren't looking at a sinking ship here. At current cash-flow rates, Micron would pay for itself in less than 10 years. And you have to assume that Micron would be bought for its growth prospects, which would accelerate the breakeven calculations even further.
Micron stock is currently trading at just 6.5 times trailing earnings. The enterprise value sits at 8.8 times free cash flow. By comparison, many investors see Apple (NASDAQ:AAPL) as a deep value play. That stock sells for 16 times trailing earnings and 16 times cash flows today. Yet Micron offers far stronger growth metrics than Apple:
So Tsinghua definitely won't be overpaying for Micron's strong financial platform. Keep in mind that Micron shares have swooned 44% lower year to date, even including today's large jump, and the memory-chip producer starts to look like a steal at these prices.
But isn't Micron doomed to disappoint these days? Last month's weak third-quarter report sure looked like a harbinger of future disasters. Micron's rampant sales growth took a break, mostly because of terrible sales in the PC systems market. From this point of view, Tsinghua's bid might be risky even if it's launched 42% below Micron's 52-week highs.
What's next, then?
All things considered, I will act as if the Tsinghua bid didn't exist.
The company's close ties to the Chinese government and the sheer scale of this deal puts huge regulatory roadblocks in front of a final agreement. If China wants to build a credible semiconductor industry of its own, it probably needs to skip shortcuts like Micron buyouts and focus on building that expertise from scratch.
Given the large chip-manufacturing operations already found within China's borders, that shouldn't be hard to do. Many Western chipmakers already build silicon products in China, either in their own factories or in the many outsourcing plants found there. And why not, since many of these chips are destined for devices built in Shenzen or Shangahi anyway? Keep the supply lines short. On the flip side, Chinese authorities and investors have plenty of chip experts within easy reach. With the right package of salary and perks, what's stopping Tsinghua from poaching enough experts to build its own top-notch chip-design teams?
So let's assume that the nameless deal insiders are on target. I still wouldn't get excited about these rumors, and I say that as a current Micron owner.
There's regulatory trouble ahead, along with lots of alternative solutions for Tsinghua's chipmaking ambitions and a lowball buyout bid. That doesn't add up to a quick and easy deal. If Tsinghua is serious and the deal also passes regulatory muster, I'd still prefer owning Micron as a standalone business rather than accepting that $21 buyout price per share.
Thanks, but no thanks. The only way this works out to a signed, sealed, and delivered buyout would be if Tsinghua's interest sparks an international bidding war -- and in that case, the winner won't be the Chinese. It's just too difficult.