Monday, May 28, 2012

Micron’s Thinking for the Acquisition of Elpida

Hirokazu Kitahara


Elpida Memory Inc., a world top three DRAM company based on Japan, filed for protection from creditors on February 27, 2012 with $5.6 billion in debt.*1 Then Micron Technology Inc., through two rounds of bidding, won the right to negotiate to buy the company after offering $2.5 billion.*2

However, what is the Micron’s strategy behind this deal? This question comes from the fact that currently it is only Samsung with more than 40% share that makes money in the DRAM market.

According to “The Five Competitive Forces That Shape Strategy” by Michael E. Porter, established rivals, customers, suppliers, potential entrants, and substitute products shape strategy. In case of the DRAM market, the point is established rivals and customers.

Established rivals
As I mentioned partly, Samsung, Hynix, Elpida and Micron occupy 42.2%, 23.0%, 13.1% and 11.6% in 2011, respectively. Moreover, there are several small DRAM companies. Compared with that of NAND flash memory, the competition is so keen that only the top tier companies are in the black.

Customers
DRAM is a type of random-access memory used for PC’s temporary memory, mobile phones and digital consumer electronics. Although there are many customers, the price is so low because of its structural simplicity.*4

The above analysis shows the strict market environment. However, even under such circumstances there is a tactics to reshape the forces; “To temper price wars initiated by established rivals, invest more heavily in products that differ significantly from competitors’ offerings.” This means to win the price competition by the scale. By implementing this strategy, Samsung becomes the overwhelming winner.

Can Micron take this strategy? I am negative because they have just begun to diversify their product portfolio beyond DRAM products.*5 The only possible guess to justify the Micron’s acquisition of Elpida is an article that Apple had placed big new orders with Elpida for DRAM is true.*6


*1 Elpida seeks bankruptcy protection, $5.6 billion debt (Reuters)
http://www.reuters.com/article/2012/02/27/us-elpida-idUSTRE81Q0OQ20120227
*2 Elpida: Micron in talks on possible investment (Reuters)
http://www.reuters.com/article/2012/05/10/elpida-micron-idUST9E8FA00K20120510
*3 Q1 DRAM Market Shares (iSuppli)
http://www.isuppli.com/Memory-and-Storage/News/Pages/Irony-Abounds-in-Q1-DRAM-Market-asBankruptcy-Bound-Elpida-Dethrones-Micron-from-Third-Rank.aspx
*4 DRAM spot price only for registered users (DRAMeXchange)
http://www.dramexchange.com/#dram
*5 Micron Technology Inc. Annual Report (2011)
http://files.shareholder.com/downloads/ABEA-45YXOQ/1895796210x0x531652/BB1C4A59-A834-4884-A4C7-245396075C52/2011_10K.pdf
*6 Apple-Elpida report (Reuters)
http://www.reuters.com/article/2012/05/17/us-elpida-idUSBRE84G01E20120517

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