There are dates that are hard to forget. For Eli Harari, founder and CEO of semiconductor company SanDisk, October 22 2008 is undoubtedly such a date. It was the height of the crisis in the US capital market, which had just crashed on the rocky ground of sub-prime and the semiconductor and memory markets. SanDisk's stock price responded accordingly, at its low point giving the company a market cap of just $1.1 billion. Suddenly, SanDisk reported that it had received takeover bid from its greatest competitor, Samsung, at a valuation of $5.8 billion. The bid gave the company a high premium, valuing it at 90% above its market cap at the time, but still 55% less than it had been worth a year earlier. SanDisk's board refused the offer, and Harari called it "opportunistic." For Jim Cramer, presenter of the high-rating television program "Mad Money" and CNBC network's capital market commentator, this was too much.
That evening, Cramer put Harari's picture on the "Wall of Shame", and he was crucified before the world as the manager who "destroyed an incomprehensible amount of value" for investors. Harari, who takes to heart what people think of him, did not remain indifferent, but now acknowledges, in an exclusive interview with "Globes", that "that was my smallest problem in those days. All in all, I believe Cramer regretted doing it."
Later, relations with Cramer improved, and there are even rumors that a friendship developed, but all this is the wisdom of hindsight. "When Samsung made its bid, Cramer thought I was living in another world, to put it mildly," Harari laughs, "and he wasn't the only one. There were also very large, well-known investors in the company who exerted a lot of pressure to sell."
Cramer took eight months to remove Harari from the wall, after the memory market and the company's performance improved. With the improvement in results, Harari decided on another kind of exit: two weeks ago he announced his intention to retire from the company at the end of the year. Sanjay Mehrotra, who founded the company with him, and is currently VP for operations, will step into his shoes.
Not looking for employment
Were the company's situation different, that is, less successful, Harari would not have to justify his retirement, but things fell out otherwise. Precisely now, SanDisk, the company he invested so much energy and faith in founding and running, is enjoying good times. The market is on the up, demand is rising, and the near future looks rosier than ever. It is therefore harder to explain the retirement of the founder and CEO. Harari himself attributes his retirement to his advanced age, but it's hard to avoid feeling that something else is going on behind the scenes.
"When you reach the age of 65, you don't know what your future path will be like," says Harari. "Everything is all right with me and in my family, but at this age, every year it will be less and less so."
Still, why did not you stay on as chairman, or at least as non-executive chairman?
"My problem is that I'm 24/7, meaning that I'm involved in the company at every moment. I don't see a possibility of being chairman and not working that way .I need it to be understood that Sanjay is in charge, that he makes the decisions, and not someone else. It has to be clear cut and without any doubts, so that people won't think that 'Eli is still there and we can turn to him.'"
The decision, Harari discloses, had been forming in him for several years. "It was very important that the company should be in a successful position, and that we should have fairly long-range visibility, so that when the next problematic cycle in the memory industry comes along, there will be someone who knows where to go. It would have been impossible to leave when the company was in a weak position, and there is no better time to do it than now."
What's next? Is there any chance that we will see you join some board of directors?
"Until the end of the year, I'm at SanDisk, and after that I currently have no plans. I will think hard before joining a board of directors; I will be very hesitant. I don't know how many years I have, but I want to make the most of this time."
Memory eroded
SanDisk, which develops chips and products for data storage using NAND flash non-volatile memory technology, was founded 22 years ago by Harari and his partners Mehrotra and Jack Yuan. Harari is considered one of the pioneers of the field, both from a business and from a research point of view, so it is not surprising that his retirement will be followed by consulting services that he will provide to SanDisk for the next two years.
The NAND memory market is one of the most turbulent that exists. According to estimates by research firm iSuppli, it will be worth $18 billion this year - representing growth of 32% over last year. At the end of the first quarter this year, SanDisk had approximately 34% of the market.
The final product of these companies - memories - is now almost everywhere: in USB devices, cellular telephones, cameras, in memory expansion cards. Today, they are more and more taking the place of the hard disk in the computer itself. This direct access to end customers has made memory a standard consumer product, so that price has become the main question. The rival companies distinguish themselves through price. The price of NAND memory is eroded by tens of percentage points each year, because of rapid technological advances, and competition. Accordingly, the investment required of the players in the market is enormous, considering the risks and the know-how involved.
The steep decline in memory prices and the huge rise in technological demands made the economic crisis of 2008-2009 especially tough. The demand, which climbed in 2005-2006, as new personal electronics products hit the market, led to massive investment by the electronics giants, on a scale of tens of billions of dollars, in setting up memory chip production lines. In the semiconductor industry, which has always suffered from wide cyclical swings, it was clear that the fall would come, but even Harari, who had experienced troughs in the industry, didn't expect a such a catastrophe.
"I never thought for a moment that it would be so difficult," he says. "It was deeper and tougher than anyone thought." SanDisk's revenue fell 15% in 2008, and the company posted a huge loss of $2billion as a result of write-downs.
Was there a moment when you thought that maybe it would all end badly?
"I never doubted that we would emerge from it, and emerge from it stronger. But that does not mean that it was not very tough."
A successful acquisition in retrospect
SanDisk's recession had already started in the third quarter of 2007.There was a sharp drop in revenue, and in every ensuing quarter the situation deteriorated further. The company instituted a series of efficiency measures that included layoffs of 12% of the workforce, which now numbers some 3,400 employees. It cut expenditure, limited the production lines, and sold 20% of total production to Toshiba. The situation was such that at one point the company sought to raise $200 million to put aside in case the crisis lasted longer than expected (in the end, the company did not need the money).
But the real blow hit SanDisk from its marketing channels. In 2008, most of the company's revenue came from retail sales (approximately 65% of product sales), but the economic crisis led to the end consumers buying less, and SanDisk was forced to think of alternative marketing strategies. One of them was to return to the original strategy of the company from its early days - boosting sales to other customers, manufacturers of electronic products that integrated the memory cards as part of the final product (OEM). Surprisingly, what enabled SanDisk to make a smooth transition to the new strategy was the acquisition of Israeli memory provider M-Systems, which took place in the summer of2006 for approximately $1.55 billion.
"The results today are without doubt attributable to the success of the transition to OEM sales, and that move could not have succeeded without the people who came from M-Systems," says Harari. But it is easy to understand that today, when sales to OEM manufacturers represent 65% of product sales in the second quarter of 2010, having multiplied 3.5 times since the company decided on the move. Most of the time since the acquisition, the bottom line had been different. SanDisk had to make huge write-downs of goodwill, R&D in progress, and other items, to lay off hundreds of workers, and to give up M-Systems' successful USB business and other activities that it failed in operating. "There's no doubt that it was worth it, but not the way we planned," Harari says of the acquisition.
The irony is that it was actually the crisis that turned the acquisition into a successful deal.
"Yes, it's true. In terms of the balance sheet, we had to write off about $1.5 billion, which reduced the value of M-Systems almost to zero, but in terms of real capability, that is, the people who joined, it was very critical. We are very proud of what we have today in the development centers in Israel"
At first glance, it is difficult to absorb the drama behind the way SanDisk got into trouble with the acquisition. Here were two companies that knew each other well, the mentality of both based on Israeli roots, with managements that had deep ties stretching back years, and, above all, the amount paid underscored the importance of the deal.
In retrospect, would you have conducted the acquisition differently?
"M-Systems did an excellent job in developing separate business units for each activity. We were organized in central units that provided services to each activity. Together with the acquisition, we decided to adopt the M-Systems approach, and that was a mistake. It was too hard, the acquisition and the organizational change as well. There were a lot of problems and confusion."
Apple no longer seen as a competitor
In weighing up the acquisition of M-Systems, the patents and the technology certainly tip the scales to the positive side. From M-Systems, SanDisk received technology that allows saving of four bits per memory cell (X4) and streamlines the use of the memory chip so that it can cope with today's flood of digital information. As well as products, SanDisk also sells patent licenses, to the tune of $400-500 million in recent years, mostly to Samsung. The technologies acquired from M-Systems certainly helped Harari in the negotiations on renewal of the patent licensing agreement with Samsung in June 2009.
The agreement with Samsung, the rise in demand, the improving economic situation, and the shortage of memory chips, put SanDisk back on track, and suddenly the situation reversed. Instead of excess capacity, the company is now short of capacity, which led Harari to go to Japan in early July to announce the opening of a new foundry, Fab 5, in partnership with Toshiba. This time round, the wave of demand will not be generated by MP3 players and USB memories as it was in 2005, but by smart phones and tablet PCs such as Apple's iPad Touch.
According to estimates, SanDisk is a major supplier of memory for Apple's iPhone (Harari would not comment on these estimates), but in the not too distant past, in 2006-2007, Harari described Steve Jobs as a competitor in the MP3 player niche. At that time, SanDisk entered the consumer market, and put its Sansa player up against the iPod. Today, presumably, the image of a competitor has changed.
"Most of the Sansa devices we sell are at prices below $100 to the final consumer.95% of what Apple sells is priced above $100, so there is hardly any overlap. So I do not see them as competitors, and they do not see us as competitors."
Published by Globes [online], Israel business news - www.globes-online.com - on August 19, 2010
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