Components | February 15, 2012

Micron and Elpida merger could rock DRAM market to its core

A possible merger between U.S. firm Micron Technology Inc. and Japan’s Elpida Memories Inc. has the potential to dramatically redraw the competitive landscape of the DRAM space, yielding a new No. 2 player that could challenge Samsung Electronics Co. Ltd.’s industry leadership.
A union between the two companies—the object of rampant rumors swirling around the industry at the moment—would catapult the newly consolidated entity to second place in the global DRAM market, with a combined capacity of 374,000 wafer starts per month (WSPM) based on the latest available information, according to information and analysis provider IHS.

The newly merged company would have a 28 percent share of worldwide DRAM manufacturing capacity, placing it just behind leader Samsung Electronics Co. Ltd. of South Korea, currently with 433,000 WSPM or 33 percent share of global capacity, as shown in the figure attached. On their own, Elpida and Micron usually place in the No. 3 and No. 4 spots, respectively.

The reconfigured DRAM terrain also would mean that Hynix Semiconductor Inc., from South Korea, falls to third place given a 23 percent share of capacity, or 300,000 WSPM, from its current perch as runner-up to Samsung.

“Overall, a Micron/Elpida merger would present Samsung with its most powerful rival yet,” said Mike Howard, senior principal analyst for DRAM & memory at IHS. “Samsung is usually 10 percentage points ahead of its next competitor, but the merger would trim it’s formidable market share lead by half, to 5 percentage points.”

Media and industry speculation currently poses the tantalizing possibility of Micron taking over Elpida, or of Elpida coming to some sort of arrangement with its rival. But before such a Trans-Pacific marriage can proceed between the leading U.S. memory player and the chief Japanese DRAM producer, both Micron and Elpida would have to face down a number of potent challenges, Howard pointed out.

The first—and largest—is Elpida’s debt. At the end of the third quarter last year, Elpida owed $4 billion in outstanding obligations. And although the DRAM industry is familiar with large amounts of debt because fabs can be extremely expensive to build and often require debt to finance, Micron is decidedly debt averse.

A second daunting challenge is the strong yen, the currency in which approximately 60 percent of Elpida’s wafers in Japan is denominated. The robustness of the currency would render manufacturing in Japan uncompetitive compared to production in other Asian countries, such as Taiwan and South Korea where most DRAM is made.

A third possible challenge could be Micron’s ongoing partnership with Taiwanese-based Nanya Technology Corp., in which the two share joint development efforts. There could be covenants in the agreement between Micron and Nanya that could sour any chance of a possible deal between Micron and Elpida, although this is unknown at the moment and has not been determined conclusively.

And in an unexpected development, the Feb. 3 death of Micron CEO Steve Appleton in an experimental airplane crash could complicate matters and delay potential consolidation, especially since Appleton was a known advocate for consolidation and was likely a driver behind any possible deal.

Other Possible Benefits from The Merger

Greater manufacturing capacity—translating into larger market share—is not the only benefit that could come out of a Micron/Elpida consolidation. In fact, both Micron and Elpida stand to reap individual gains, Howard said.
For Elpida, a key advantage would be greater access to the premium customer segments that Micron serves.

In the third quarter, Elpida DRAM commanded an average selling price of $0.70 per gigabyte, compared to an enviable, near-double rate for Micron at $1.34 per gigabyte. Micron, clearly, is serving a different customer group that Elpida simply would love to get its hands on, IHS believes.

But while Elpida would gain access to Micron’s specialty customers in a merger, Micron also would be able to reach Elpida’s mobile DRAM buyers. Elpida shipped 18.4 percent of mobile bits in the third quarter, compared to only 5.3 percent for Micron. And with mobile DRAM now accounting for about 15 percent of the total DRAM market, such leverage for Micron would constitute an unqualified boost and help expand its overall revenue.

For the customers of both, a combined Micron/Elpida entity could prove a blessing as well as a curse. A merger would result in one less supplier for the market, which could have the effect of allowing the other remaining players in the DRAM space to enjoy even more leverage over their customers. But a merger could also prove to be crucially needed ballast against the overwhelming size and influence of Samsung, acting as a foil to the South Korean’s relentless advance in DRAM.

Overall, the benefits of a more stable market resulting from the merger probably would outweigh the drawbacks of having one less supplier, Howard remarked.


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