Why The Takeover Of Micron By Tsinghua Is A Grim, Though Unlikely, Possibility

Micron Technology’s (NASDAQ:MU) stock price was up almost 15% last week after the Wall Street Journal released a report stating that Chinese state-owned semiconductor chip maker Tsinghua Unigroup is working on a $23 billion takeover bid for the company. Though both Micron and Tsinghua declined to comment, sources claim that Micron has told Tsinghua that its acquisition offer is not realistic because the U.S. authorities would block the deal due to national security concerns. ^[1]

In this article, we discuss how the deal could be a good move for the Chinese semiconductor industry and why the acquisition is likely to face opposition from the regulatory authorities in the U.S.

Why Tsinghua Would Want To Acquire Micron?

Accounting for about 45% of global demand for chips (used both in China and for exports), China is by far the largest consumer of semiconductors in the world. However, more than 90% of its consumption relies on imported integrated circuits. ^[2] In 2013, China imported $232 billion of semiconductor materials, more than it spent on petroleum. ((Micron Technology Is Said to Be Takeover Target of Chinese Company, The New York Times, July 14, 2015))

Integrated-circuit companies in China entered the semiconductor market late, about two decades after the rest of the world. Though there has been some slow but steady progress among local foundries, the Chinese local players have been reluctant to invest in cutting-edge technologies for reasons including high costs, scale and (in some cases) export restrictions on the sophisticated tools and machines required to produce semiconductors. However, things are changing on both business and policy fronts, and the performance gap between Chinese and other companies has been shrinking. ((Semiconductors in China: Brave new world or same old story, McKinsey Insights & Publications, August 2014))

The Chinese government is now putting significant funding and effort behind new policies relating to the development of the semiconductor industry. It has appointed a unique task force charged with setting an aggressive growth strategy, targeting a compound annual growth rate of 20% for the industry between now and 2020. The Chinese government has set aside a budget of $170 billion to spend over the next five to ten years. ((Semiconductors in China: Brave new world or same old story, McKinsey Insights & Publications, August 2014))

Tsinghua Unigroup has managed to become China’s top chip maker after it acquired RDA Microelectronics and Spreadtrum in deals totaling $2.6 billion. The company is controlled by Tsinghua University in Beijing, which counts President Xi Jinping among its alumni, and is backed by China’s central government. In September 2014, Intel invested $1.5 billion in Tsinghua. (Read: Intel’s Collaboration With Tsinghua To Expand Its Footprint In The Chinese Mobile Chip Market) According to Willy C. Shih, a professor of technology and operations management at Harvard Business School, an acquisition would save China years in catching up with industry leaders, like Intel and Samsung. ((Micron Technology Is Said to Be Takeover Target of Chinese Company, The New York Times, July 14, 2015))

If the deal goes through, it will be the largest takeover of an American company by a Chinese firm.

Why The Acquisition Might Not Go Through?

Given the enormous dependence of modern weapons on computer chips, Micron believes that the U.S. will block the deal on concerns of national security. The company is of the view that the acquisition by Tsinghua would not be approved by the U.S. inter-agency task force called the Committee on Foreign Investment in the United States (CFIUS), which has the power to stop mergers that might endanger national security.

According to Credit Suisse, a trade war is brewing between the U.S. and China over the production of chips. After the major consolidation drive in the memory market in the last few years, Micron is the only remaining U.S. based memory chips maker, with facilities in the U.S. and across Asia, but relatively little production in China. The loss of ability to make advanced memory chips could affect American security. ^[3]

Also, many analysts are of the view that the $23 billion bid is too low for Micron. Micron’s market cap was significantly higher last year. Its stock has been on a downhill trajectory since the start of 2015, owing to weaker-than-expected PC sales, adverse currency headwinds (the company earns a sizable amount of its business overseas, especially Japan), and Micron’s own admission that its DRAM and NAND output growth will lag the industry growth in calendar year 2015 (as it executes on key milestones in technology deployment and product introductions).

Despite the short-term weakness, Micron remains a fundamentally strong company, in our view. The company’s growing focus on non-PC DRAM markets and its early entry in the lucrative 3D NAND market offer it strong, long-term growth potential. While we recently lowered our valuation for the company, our current price estimate of $25 is still more than 30% above the company’s current market price. (Read: Here’s Why We Believe Micron Is Worth $25)

See our complete analysis for Micron here

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1. Micron does not believe deal with Tsinghua is possible – sources, Reuters, July 21, 2015 [↩]
2. Semiconductors in China: Brave new world or same old story, McKinsey Insights & Publications, August 2014 [↩]
3. Micron Technology Is Said to Be Takeover Target of Chinese Company, The New York Times, July 14, 2015 [↩]