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The Micron-Numonyx Deal: Why Bother?

Posted on Monday, Apr 5th 2010

In February, Micron (NYSE:MU) announced its plans to buy Numonyx and its NOR Flash technology for $1.27 billion. With this acquisition, Micron will broaden its portfolio and rival Samsung as a one-stop shop for memory. Let’s take a closer look.

From a pure-play DRAM maker, Micron has expanded into other markets. It now sells DRAM, NAND flash, and SRAM. Numonyx, on the other hand, sells NAND, NOR, and a next-generation technology called phase-change memory (PCM). This acquisition will add NOR and PCM to its portfolio.

The primary use of NOR is in cell phones, a market that is expected to reach 1.2 billion units in 2010. However, stiff competition is driving down component prices, and NOR is no exception. Numonyx has been posting losses for several years, and its revenue in 2009 was $1.8 billion. The company, which was launched two years ago by Intel, STMicroelectronics, and private equity firm Francisco Partners, has about 34% of the $4.5 billion NOR flash market. But analysts expect this market to be flat in 2010. In 2010, NOR units are forecast to increase 13% but the ASPs are forecast to fall 10%.

EETimes tries to analyze the reasons behind the Numonyx deal, but it is really hard to see any. After three years of losses, Micron has recently reported profit, and it is now investing in a low-margin area like NOR. Why?

Last week, Micron which had annual revenue of $4.8 billion, reported strong second quarter sales of about $2 billion, double from $1 billion last year. Net income was $365 million, or $0.39 per share, versus net loss of $763 million or $0.99 per share last year.

DRAM sales increased 24% due to 17% rise in sales volume and a 7% rise in ASPs. NAND sales were down slightly due to a slight decrease in ASPs. Gross margin improved from 27% last quarter to 35% due to the rise in ASPs and decreases in manufacturing costs. The company ended the quarter with $1.9 billion of cash. Q1 coverage is available here.

Micron is currently trading around $10 with market cap of about $9 billion. It hit a 52-week high $11.34 on January 6 and was recently downgraded by UBS from Buy to Neutral.

Chart for Micron Technology Inc. (MU)

Last month, National Semiconductor (NYSE:NSM), a leader in analog power management technology with annual revenue of about $1.46 billion, reported third quarter revenue of $362 million, up 24% y-o-y and 5% q-o-q. Net income was $53.2 million or $0.22 per share, versus net income of $47 million, or $0.20 per share last year. Q2 coverage is available here.

Gross margin was 67.3%, up from the 65.3% last quarter and 57.5% last year due to a stronger product mix and improving manufacturing cost performance. The company ended the quarter with cash reserve of $869 million, up from $822 million in the last quarter, and paid about $16 million of its debt principal.

At the end of January, NSM launched its new SIMPLE SWITCHER power modules that integrate switchers, the passives, and the magnetics in a single package. Another revenue growth area is automotive applications and in particular, automotive infotainment, where NSM supplies its FPD-Link technology for in-car communications and display management.

NSM is also looking to increase revenue in new areas such as LED lighting and renewable energy. Its LED lighting solutions address industrial applications and extend to LED power management applications and mobile phone and notebook computer displays. LED solutions accounted for about 6% of total sales in the quarter.

According to Gartner, demand for LEDs used in backlighting for televisions, monitors, and other systems is expected to double year-to-year until at least 2012. In 2009, LED penetration grew from 15% of the notebook market to 75%. A major reason for this growth is the low power consumption by LED, and companies such as Samsung, National Semi, and Micron have sharpened their focus on the sector.

The wireless or cellular base station market showed the fastest growth, driven by increased shipments of the company’s infrastructure power management, data converters, interface, and timing products to European and Chinese communications infrastructures.

NSM expects fourth quarter revenue of $375 million to $390 million, or up 4% to 8% q-o-q. It is currently trading around $14.5 with market cap of about $3.5 billion and a 52-week range of $10.81 to $16.20. It was recently upgraded by Bernstein from Under Perform to Market Perform.

Chart for National Semiconductor Corporation (NSM)

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I don't understand, why they are buying NSM at all … As an economist, i do not see any rationality in this. Hopefully for the investors they do know what they are doing… Investors don't trust them anyway, the price of MU fell down -25% in last 3 months…

Spodní prádlo Friday, July 15, 2011 at 6:56 AM PT