Saifun Semiconductors Ltd.'s (Nasdaq:SFUN) investors can like the acquisition of the company by Spansion Inc. (Nasdaq: SPSN) or not, but one thing is certain: they were surprised and didn't think it would happen, at least not now. Analysts, some of whom have been covering the company for several years and who have a more intimate knowledge of what is happening in it and in its market, were also caught off guard.
Here is proof: Last Monday, at 9:15 in the morning, we met with semiconductor analyst Daniel Amir, who has just moved from WR Hambrecht to Lazard Capital Markets. "Saifun's largest customer, Spansion, has been in a crisis for six months now, and this has been seen in its results," Amir told us," and there are no new customers for data, which is precisely the field that would make investors want to become shareholders. Notwithstanding this, 2008 will look better," he predicted. "Could Spansion buy Saifun?" we asked. "Companies like these don't acquire foreign companies," replied Amir, "and as rule, semiconductor companies don't usually acquire intellectual property companies. So there isn't really anyone who would buy Saifun, in my view."
Just a few kilometers away from our meeting place, the two companies announced, three hours later, that Spansion would acquire Saifun for $368 million in cash and shares, with the cash component based entirely on the amount of cash that Saifun has. The premium was 8% over Saifun's market cap at the time. Amir called shortly after and admitted he had been taken by surprise. "For the investors who invested in Saifun, this is a disappointing end," he said.
We do not say this as a criticism of Amir or the other analysts. Quite the contrary. It turns out that behind the scenes, Saifun's chairman and CEO Dr. Boaz Eitan and the company's board saw a different reality from the one the market saw. Apparently they knew there were no data contracts in the offing, and that they couldn't afford to continue taking the same road they had done so far. The investors felt that Eitan had sold his vision too soon, but seemingly, there was no alternative - the vision would have been wiped out completely if the company had carried on like this.
The board members, aside from Eitan, are Koby Rozengarten, who served as president until July; former KLA Tencor chairman Kenneth Levy; former Concord Ventures founding partner Matty Karp; Marvell Technology Group (Nasdaq: MRVL) VP Finance and CFO George Hervey, who served as senior VP, CFO and secretary at Galileo Technology Ltd., which was acquired by Marvell in 2001; and former Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) VP finance and CFO Ida Keidar Malits. According to Eitan, they voted unanimously in favor of the acquisition.
Saifun has a non-volatile memory technology called NROM, which doubles storage capacity to 2 bits per memory cell. Its second generation technology, called Quad NROM, increases capacity to 4 bits per memory cell. Saifun was a promising intellectual property company until the latter part of 2006, when its customer, Qimonda AG, quit the field, causing the company to lose 45% of its revenue. Saifun sells products for use in three fields: code programming, a field whose customers include Spansion and Macronix International Co. Ltd. (Nasdaq: MXIC); embedded applications in electronic products; and data, the really promising field that investors had pinned their hopes on. The company promised a new data customer by the year's end, but that probably won't happen.
Amir says, "Saifun found itself in a situation where it had no new potential customers for data, a field where the company's future lies, and which will determine whether or not it will succeed. Since investors had no incentive to buy the stock, the company's managers realized that they would be better off selling it to the company that had been the most successful in its use of Saifun's technology - Spansion - and becoming one of its divisions. However, I am surprised that it went through at prices like these, almost rock bottom. As a rule, you don't see companies selling at the bottom, and if they do, they get a higher premium. This didn't happen here, and I believe the board lost faith in Saifun's ability to be a big story as an independent company."
Globes: But lots of companies like these continue operating this way, even if there isn't anything on the horizon, in the hope that, at some point, it will all work out.
Amir: "True, but I believe that in this case, the board realized that it was impossible to continue holding on to all of the $230 million in cash when the company is in a crisis, and that it would be better to return it to investors. That said, the companies will try to commercialize as many NROM patents as possible, and also get royalties from the portfolio. Spansion has spent a relatively small sum on the purchase of Saifun, which is profitable and will therefore contribute to its profitability. It is getting all Saifun's R&D, which includes 200 engineers, and together they can sue Samsung for infringing a Saifun patent, should the latter bring out a product. They will now have a greater ability to do this."
For the investors that invested in Saifun - not just in the IPO but also over the last six months at prices of $10-11, assuming that the technology will work within 3-5 years - this is a disappointing end, because the company sold at a low. "Spansion's share is also at low and it could rise, but I look at where it should have been," says Amir. "It will now be focusing principally on the world of code, Spansion's world, and not data. I don't see Samsung or Hynix, both of which are from the data field, purchasing licenses from Spansion, which is a rival. It's not that this isn't happening in the market - Samsung, for instance, is buying NAND from SanDisk - but I don't see much chance of it happening in this case."
Is there a chance that some activist investors will claim the price is too low and attempt to cancel the acquisition?
"This can happen in any merger. However, the recent quarters show that Saifun has been struggling, and there's no upside in the figures. There's always a case for activist investors. They can always claim that Eitan sold cheaply and that the company is worth more because it is profitable, and that it has plenty of cash and patents, but Saifun is at a crossroads. It's future will be connected to that of Spansion in the coming years, and it will be better off being part of them and being successful through them. If the company had been a success, the situation would have been different."
What is the situation on the markets today?
"I think we've not yet seen the end of the crisis. The problem is real, a few more funds will collapse and the banks will have to make write-offs. It will remain tolerable if the US market does not enter a recession, because if that happens, the problem will get worse. Speaking generally, the technology market entered a sort of crisis in the middle of last year, and mergers such as Alcatel-Lucent and Nokia-Siemens accelerated this process. The reason is that when two large companies like these merge, they carry out internal assessments, cancel projects, and sometimes they stop making orders. At present the technology market is positive, and there are initial signs that show it is emerging from the crisis. I think that 2008 will be a very strong year, and among the fields that already appear to weathered the crisis well, one can include WiMAX, Fiber to the Home, and wireless, especially mobile handsets, high-resolution cameras, processing applications, and networking."
Published by Globes [online], Israel business news - www.globes.co.il - on October 15, 2007
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