China-based and state-owned Tsinghua Unigroup has revealed intentions of launching an offer to acquire US semiconductor firm, Micron Technology, Inc. (NASDAQ:MU) for $21 per share. This reflects an amount of $23 billion in what could be the biggest foreign acquisition by a Chinese firm.
Tsinghua Unigroup is a subsidiary of Tsinghua Holdings. Tsinghua Holdings is the asset management division or financing arm of Tsinghua University.
In May 2015, it bought a 51% share in Hewlett-Packard’s (HPQ) new data networking operations business, H3C, for ~$2.3 billion. With this acquisition, Tsinghua Holdings will now have a 51% share of H3C Technologies’ networking operation along with Hewlett-Packard’s enterprise operations in China.
To learn more about the HP-H3C sale, please read Why HP Sold Its 51% Stake in H3C Technologies This Month.
China aims to develop a native semiconductor industry
In October 2014, the National Integrated Circuitry Industry Investment Fund was formed in China with the aim to build a native semiconductor sector where the DRAM (dynamic random access memory) industry would be the cornerstone. Micron is dominant in the DRAM space. It offers Tsinghua Unigroup an ideal opportunity to strengthen its position in this space.
As the above chart shows, Samsung (SSNLF) leads this space with a 39.60% share. Micron and SK Hynix have a 27.40% and 25.10% market share, respectively. They’re the other dominant players in this space. Micron is a dominant player in the DRAM space.
If you’re bullish about Micron Technology, you can invest in the QQQ PowerShares ETF (QQQ). QQQ invest about 0.59% in Micron.
Later in this series, we’ll discuss why this deal would be significant for China’s semiconductor industry if it goes through.
Is the offer too low?
Due to the reasons mentioned above, Micron’s share prices have fallen significantly in the last few weeks. Micron values its plant and equipment at ~$26 billion. Micron also boasts of significant memory technology patents along with manufacturing facilities in the US, Taiwan, Japan (EWJ), and Singapore. As a result, many analysts feel that the offered price of $23 billion for Micron’s acquisition is too low to be considered.
J.P. Morgan analysts shared that an offer of $27–$29 per Micron share would have been realistic. Needham analysts thought that Micron wouldn’t settle for anything less than $35 per share.
Commenting on Tsinghua’s $23 billion offer for Micron, Kevin Cassidy, an analyst with Stifel, stated that “We think the price was only floated through the media because they were too embarrassed to bring it to Micron’s board.”