Credit Suisse

We believe that a new Micron Technology rights agreement increases that possibility of strategic investment or acquisition in near term.

Micron (ticker: MU ) filed an 8-K after the close on Friday, July 22, disclosing that the company has adopted a rights agreement that would, at the discretion of Micron’s Board, avoid a technical “ownership change” in the event an investor takes an equity position of more than 5% in order to protect the benefit of about $4 billion of net operating losses (NOLs). The rights agreement both helps to facilitate a strategic investment but also acts as a quasi-poison pill given board discretion.

There have been recent Media reports indicating that Micron is in negotiation with China Inc. on establishing a joint venture for NAND manufacturing, and our recent checks suggest that Intel ( INTC ) has slowed Dalian [Chinese wafer-fabrication plant] expansion -- we believe that China or Intel could be potential investors or acquirers. Value of NOLs is greater for Intel than strategic investor from China; however note that China investments are driven by private-equity firms that may also care about the NOLs.

Based on historic average premium of 34% for average Chinese acquisitions, and replacement value of capacity of $22, we estimate that a strategic investment is likely to value Micron at $17-$22 per share, and would be positive for the stock. In terms of impact to broader Semis and Semiconductor Capital Equipment (Semicap), investment by China would likely be perceived as very positive for Semicap but negative for other Memory companies, while Investment by Intel will likely be viewed as modest negative for Semicap companies and modest positive for Memory industry.

We estimate potential Chinese investment could value Micron at $17-$22 per share, however see the investment limited to less than 10% of Micron. There have been recent media reports that have indicated that XMC [of China] is in talks with Micron to establish an Inotera-like supply arrangement with Micron to manufacture NAND -- we see potential Chinese equity investment accompanied by some manufacturing agreement. [Inotera is Micron’s Taiwan DRAM chip joint venture.]

Such a supply arrangement would allow Micron to grow their NAND capacity without the capital-expenditure burden, and could be positive for Micron. Note that China has in past made equity investments when pursuing partnerships with overseas technology -- most recently Tsinghua [Chinese state-controlled tech group] attempted to take a 15% stake in Western Digital (WDC) prior, at a 33% premium to Western Digital share price. Assuming a Western Digital-like premium, would imply investment at $17.50 per share. We expect that a more than 10% equity investment from China would trigger The Committee on Foreign Investment in the United States (CFIUS) review, which is viewed as unlikely to come through in a case of memory investment; as a result investment is likely to be limited to an equity investment of less than 10%. Historic premiums for China private-equity firms acquiring U.S. companies has come at a 34% premium, which would value Micron at $17.70. Last year Tsinghua was reported in media to pursue the acquisition of Micron at $21 per share -- this could also be indicative of a price that was acceptable to a Chinese investor.

We note that Intel has been building new capacity at Dalian -- it could be cheaper for Intel to buy NAND capacity from Micron than to invest in expanding new capacity at Dalian. Intel could secure more capacity at Micron by making an equity investment in Micron that could give them access to greater bits produced at cost at Micron. The acquisition would come with cost synergies (duplication of research and development related to solid-state drives (SSD), and cost of sales related to PC/Server), however may face regulatory hurdles (SSD/XPoint). The acquisition will also allow Intel to increase scale in manufacturing. Given the replacement cost [cost to build new capacity] of $29 billion [with Micron’s enterprise value at only $19 billion], we could see potential price at 1 times replacement cost (assuming Intel buying for Micron’s capacity) which would imply offer as high as about $22 per share.

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