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Strategy Analysis - Micron Acquisition of Elpida
 

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    Strategy Analysis - Micron Acquisition of Elpida Strategy Analysis - Micron Acquisition of Elpida Document Transcript

    • Team Assignment III: Capstone Paper Analysis of the Acquisition of Elpida Memory, Inc. by Micron Technology, Inc. MGMT 619 ▪ Fall 2012 ▪ Prof. Tammy L. Madsen Adi Aloni Gabriel Bowers Vijay Karakala Olena Marchenko Rafik Mikhael Carla Nunes Alex Reitor 1
    • TABLE OF CONTENTSI. WALL STREET JOURNAL ARTICLE AND EXECUTIVE SUMMARY ............................... 7 I. A. WALL STREET JOURNAL ............................................................................................................ 7 I. B. EXECUTIVE SUMMARY ............................................................................................................. 10 I. B1. Strategic Move...................................................................................................................... 10 I. B2. Major Issues .......................................................................................................................... 10 I. B3. Key Analysis ......................................................................................................................... 11 I. B4. Final Recommendation ......................................................................................................... 12II. EXTERNAL ANALYSIS ....................................................................................................13 II. A. INDUSTRY DEFINITION ............................................................................................................. 13 II. B. SIX FORCES ANALYSIS ............................................................................................................. 13 II. B1. Level One Analysis ............................................................................................................... 13 II. B2. Level Two Analysis............................................................................................................... 13 II. B3. Level Three Analysis ............................................................................................................. 16 II. C. MACRO ENVIRONMENTAL FORCES ANALYSIS, ECONOMIC TRENDS AND ETHICAL CONCERNS ............17 II. C1. Global ...................................................................................................................................17 II. C2. Social .................................................................................................................................. 18 II. C3. Technological ....................................................................................................................... 18 II. C4. Governmental/Political ........................................................................................................ 19 II. C5. Ethical ................................................................................................................................. 20 II. C6. Macroeconomic Trends ........................................................................................................ 21 II. C7. Demographic Trends ............................................................................................................ 21 II. D. COMPETITOR ANALYSIS ........................................................................................................... 21 II. D1. Firm’s Competitors ............................................................................................................... 21 II. D2. Primary Competitors ............................................................................................................ 22 II. D3. Primary Competitors’ Business Level and Corporate Level Strategies .................................... 24 II. D4. How Competitors Achieve their Strategic Position ................................................................ 26 II. D5. Value Minus Cost Analysis.................................................................................................... 28 II. D6. Comparative Financial Analysis............................................................................................ 31 II. D7. Implications of Competitor Analysis ...................................................................................... 32 II. E. INTRA-INDUSTRY ANALYSIS...................................................................................................... 33 2
    • II. E1. Industry Evolution and Formation of Strategic Groups ........................................................... 33 II. E2. Strategic Industry Groups ..................................................................................................... 34 II. E3. Mobility Barriers, Threats and Opportunities ......................................................................... 35 II. E4. Competitive Dynamics ......................................................................................................... 36 II. E5. Firm’s Competitive Position ...................................................................................................37 II. F. THREATS AND OPPORTUNITIES ANALYSIS .................................................................................. 38 II. G. SUMMARY OF EXTERNAL ANALYSIS ........................................................................................... 38III. INTERNAL ANALYSIS .....................................................................................................39PART 1 – MICRON ...................................................................................................................39 III. A. BUSINESS DEFINITION/MISSION ................................................................................................ 39 III. B. MANAGEMENT STYLE .............................................................................................................. 39 III. C. ORGANIZATION STRUCTURE, CONTROLS AND VALUES ................................................................ 40 III. C1. Organizational Structure ..................................................................................................... 40 III. C2. Organizational Controls ...................................................................................................... 41 III. C3. Organizational Values ......................................................................................................... 41 III. D. STRATEGIC POSITION DEFINITION ............................................................................................. 42 III. D1. Corporate Level .................................................................................................................. 42 III. D2. Business Level .................................................................................................................... 45 III. D3. Resources & Capability Level ............................................................................................... 45 III. E. FINANCIAL ANALYSIS ............................................................................................................... 45PART 2 – ELPIDA ....................................................................................................................47 III. A. BUSINESS DEFINITION/MISSION ................................................................................................ 47 III. B. MANAGEMENT STYLE .............................................................................................................. 47 III. C. ORGANIZATION STRUCTURE, CONTROLS AND VALUES ................................................................ 48 III. C1. Organizational Structure ..................................................................................................... 48 III. C2. Organizational Controls ...................................................................................................... 48 III. C3. Organizational Values ......................................................................................................... 49 III. D. STRATEGIC POSITION DEFINITION ............................................................................................. 50 III. D1. Corporate Level .................................................................................................................. 50 III. D2. Business Level .................................................................................................................... 52 III. D3. Resources & Capability Level ............................................................................................... 52 3
    • III. E. FINANCIAL ANALYSIS ............................................................................................................... 52IV. ANALYSIS OF THE EFFECTIVENESS OF THE STRATEGY ..........................................53 IV. A. IS ACQUISITION THE RIGHT MOVE? ............................................................................................ 53 IV. A1. Make vs. Buy ...................................................................................................................... 54 IV. A2. Ally or Acquire .................................................................................................................... 54 IV. A3. Porter’s Tests ...................................................................................................................... 54 IV. B. COMBINED RESOURCES AND CAPABILITIES, V-C, AND INDUSTRY CONDITIONS ............................... 55 IV. C. M&A VALUATION ................................................................................................................... 56 IV. C1. Most Likely Case Scenario ................................................................................................... 56 IV. C2. Best Case Scenario ............................................................................................................. 56 IV. C3. Worst Case Scenario ........................................................................................................... 57 IV. C4. Valuation Conclusion .......................................................................................................... 57 IV. D. OTHER CRITICAL ISSUES ........................................................................................................... 58V. RECOMMENDATIONS .....................................................................................................59 V. A. SHORT-TERM AND LONG-TERM RECOMMENDATIONS ................................................................. 59 V. A1. Short-Term Recommendations ............................................................................................ 59 V. A2. Long-Term Recommendations ............................................................................................. 61 V. B. STRATEGY IMPLEMENTATION ................................................................................................... 63 V. B1. Implementation of Short-Term Recommendation: Revise Product Mix .................................. 63 V. B2. Implementation of Long-Term Recommendation: Partner with Intel for DRAM Process Development ................................................................................................................................. 64 V. C. RECOMMENDATIONS FOR CORPORATE SOCIAL RESPONSIBILITY & ETHICS ..................................... 65 V. C1. Short-Term Recommendation .............................................................................................. 65 V. C2. Long-Term Recommendation ............................................................................................... 66VI. CONCLUSIONS ................................................................................................................67VII. BIBLIOGRAPHY ...............................................................................................................69VIII. MAIN APPENDIX ..............................................................................................................76IX. FINANCIAL BACKGROUND APPENDIX .......................................................................103 4
    • LIST OF EXHIBITSEXHIBIT 1: DRAM INDUSTRY DIAGRAM .............................................................................................. 76EXHIBIT 2: SIX FORCES ANALYSIS – LEVEL ONE ................................................................................ 76EXHIBIT 3: DRAM CAPACITY AS A KEY REVENUE DRIVER ................................................................. 84EXHIBIT 4: COST LEADERSHIP – SAMSUNG LEADING THE PACK ..................................................... 84EXHIBIT 5: “THE GREAT IT SHIFT” – SMARTPHONES AND TABLETS OVERTAKE DESKTOPS ANDNOTEBOOKS........................................................................................................................................ 85EXHIBIT 6: GROWTH AND DRIVERS FOR GLOBAL DATA TRAFFIC MEASURED IN EXABYTES ......... 85EXHIBIT 7: VRIO ANALYSIS ................................................................................................................. 86EXHIBIT 8: VALUE DRIVERS AND VALUE ESTIMATIONS.................................................................... 88EXHIBIT 9: VALUES, COSTS AND PRICES ........................................................................................... 89EXHIBIT 10: PRIMARY COMPETITORS FINANCIAL RATIOS ................................................................ 91EXHIBIT 11: ANALYSIS OF ACQUISITIONS .......................................................................................... 95EXHIBIT 12: ANALYSIS OF PARTNERSHIPS ........................................................................................ 95EXHIBIT 13: BCG MATRIX FOR MICRON .............................................................................................. 98EXHIBIT 14: MICRON’S VALUE CHAIN................................................................................................. 98EXHIBIT 15: ELPIDA’S ORGANIZATION CHART .................................................................................. 99EXHIBIT 16: ELPIDA’S CORPORATE GOVERNANCE BODIES AND COMMITTEES .............................. 99EXHIBIT 17: ELPIDA’S VALUE CHAIN ................................................................................................. 100EXHIBIT 18: ALLY OR ACQUIRE FRAMEWORK FOR ELPIDA’S ACQUISITION .................................. 100EXHIBIT 19: COMBINED COMPANY’S VALUE MINUS COST ............................................................. 101EXHIBIT 20: COMBINED COMPANY’S VRIO ANALYSIS .................................................................... 102EXHIBIT 21: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS MICRON .............................. 103EXHIBIT 22: CAPEX AND R&D EXPENDITURES – INDUSTRY AVERAGE VERSUS MICRON .............. 103EXHIBIT 23: MICRON’S STANDALONE VALUATION ......................................................................... 104 5
    • EXHIBIT 24: MICRON’S GROWTH FORECAST ................................................................................... 105EXHIBIT 25: MICRON’S GROWTH FORECAST FOR FCF COMPONENTS ........................................... 106EXHIBIT 26: MICRON’S WACC CALCULATION ...................................................................................107EXHIBIT 27: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS ELPIDA ................................ 109EXHIBIT 28: ELPIDA’S STANDALONE VALUATION .......................................................................... 110EXHIBIT 29: ELPIDA’S GROWTH FORECAST ...................................................................................... 111EXHIBIT 30: ELPIDA’S GROWTH FORECAST FOR FCF COMPONENTS ............................................. 112EXHIBIT 31: SENSITIVITY / REGRESSION ANALYSIS FOR ELPIDA’S STANDALONE VALUATION.... 112EXHIBIT 32: “MOST LIKELY” SYNERGIES FROM ELPIDA’S ACQUISITION ........................................ 114EXHIBIT 33: VALUATION OF SYNERGIES .......................................................................................... 114EXHIBIT 34: COMBINED VALUATION – MOST LIKELY CASE SCENARIO ...........................................115EXHIBIT 35: COMBINED VALUATION – BEST CASE SCENARIO ........................................................ 116EXHIBIT 36: COMBINED VALUATION – WORST CASE SCENARIO.................................................... 116EXHIBIT 37: SENSITIVITY/REGRESSION ANALYSIS OF THE COMBINED FIRM (MOST LIKELY CASESCENARIO) .......................................................................................................................................... 117EXHIBIT 38: FINANCIAL EFFECT OF SHORT-TERM REVISION IN PRODUCT MIX FOR YEAR 2013 ... 118EXHIBIT 39: FINANCIAL EFFECT OF NOT ACHIEVING THE 15NM TECHNOLOGY NODE BY 2016.... 119EXHIBIT 40: STACKELBERG GAME MODEL VS. COURNOT GAME MODEL...................................... 119 6
    • I. WALL STREET JOURNAL ARTICLE AND EXECUTIVE SUMMARYI. A. Wall Street JournalTechMicrons Purchase of Elpida Seen as Positive for Chip IndustryBy Juro Osawa And Lorraine Luk735 words3 July 201207:17 AMThe Wall Street Journal OnlineWSJOEnglishCopyright 2012 Dow Jones & Company, Inc. All Rights Reserved.Micron Technology Inc.s acquisition of Elpida Memory Inc. is good news for other majorsuppliers of computer memory chips in Asia, as industry consolidation will likely help easethe oversupply problem that has been plaguing the market for years.When Micron takes over the failed Japanese rival and streamlines its operations, the wholeindustry could benefit from more subdued supply and higher prices of dynamic randomaccess memory, or DRAM, chips, analysts said."Longer term, as the industry consolidates, we predict more rational supply behavior andhence higher and more stable profits for survivors," Sanford Bernstein analyst MarkNewman wrote in a report after Micron announced the $2.5 billion deal Monday.With the Elpida acquisition, Micron will overtake South Koreas SK Hynix Inc. to becomethe worlds second-largest DRAM maker by revenue, behind another South Koreancompany, Samsung Electronics Co. DRAM chips are widely used in personal computers andmobile devices.While there are several smaller Taiwanese players, analysts expect the DRAM market tobecome increasingly dominated by Samsung, Micron and Hynix.Microns deal, expected to close in the first half of next year, comes at a time many DRAMmakers are trying to emerge from losses due to weak chip prices. After DRAM makers keptbuilding capacity to increase or maintain market share, the sector became a market withfew winners. As DRAM chips used in PCs have become highly commoditized and priceshave remained weak in recent years, many players are struggling to make money. 7
    • Elpida, Japans only DRAM maker, filed for bankruptcy protection in late February afterstruggling to repay hefty debts amid falling chip prices and as the yens strength eroded itsoverseas profits.Shortly after Elpidas collapse, DRAM prices rose on expectations for a tighter globalsupply."The consolidation of the DRAM market set off by Elpidas bankruptcy and the subsequentpurchase by Micron is bringing new stability to DRAM pricing," said Mike Howard, IHSiSuppli analyst, in a report.Thanks to more stable chip prices, the global DRAM industrys overall revenue is expectedto rise 3.3% this year to $30.5 billion, after it plunged 25% last year, according to IHSiSuppli.Micron, which was selected as Elpidas potential financial sponsor in May, said Monday thatit agreed to buy the Japanese company for $2.5 billion.Sanford Bernsteins Mr. Newman expects Micron to convert some of Elpidas DRAMfacilities to produce NAND flash memory chips instead, while the U.S. company may alsoshut down the Japanese firms least efficient facilities. This process, he said, would result inmore subdued DRAM chip supplies. DRAM and NAND chips are different types of memorychips, and mobile devices such as smartphones use both.On Monday, Micron Chief Executive Mark Durcan declined to provide any details aboutconverting Elpidas DRAM capacity to flash memory chips, but said it was something thatMicron could do to address market demand.While the expected increase in Microns global market presence could mean morechallenges for rivals Samsung and Hynix, analysts say the South Korean companies are alsowell positioned to benefit from industry consolidation and more stable chip prices.Samsung and Hynix declined to comment on whether or how Microns acquisition mightaffect them.By contrast, the environment remains tougher for Taiwanese players such as NanyaTechnology Corp., Inotera Memories Inc., a joint venture between Micron and Nanya, andWinbond Electronics Corp.As Taiwanese players have few advantages against larger South Korean players, there maybe more consolidation in Taiwans DRAM industry over the next few years, analysts say.While more stable DRAM prices would be positive for Taiwanese players, too, their abilityto take advantage of the improving environment is limited because they are already too farbehind the first-tier players like Samsung and Hynix in terms of technology and marketpresence, said William Wong, an analyst at Taiwans Fubon Securities. 8
    • Nanya and Inotera declined to comment on their competitive environment or possibility ofconsolidation. Winbond couldnt be reached immediately for comment.Jung-Ah Lee contributed to this article.Write to Juro Osawa at juro.osawa@dowjones.com [mailto:juro.osawa@dowjones.com]and Lorraine Luk at lorraine.luk@dowjones.com [mailto:lorraine.luk@dowjones.com] andLorraine Luk atDow Jones & Company, Inc.Document WSJO000020120703e873006el 9
    • I. B. Executive SummaryMicron Technology, Inc. (Micron) designs, manufactures, and sells semiconductor memoryproducts of three main types – DRAM, NAND flash, and NOR flash. These products are usedin multiple applications, such as PCs and notebooks, mobile devices, servers and consumerelectronics, as well as in automobiles and medical devices. This paper focuses on theDRAM business, in which Micron is the only American-based company left. The othermajor players in this space are South Korean companies Samsung Electronics (Samsung)and SK Hynix (Hynix), and Japanese Elpida Memory, Inc. (Elpida). This paper focuses onMicron’s DRAM business.I. B1. Strategic MoveIn July 2012, Micron has agreed to acquire Elpida for a total of about $2.5B, out of which$750 million is to be paid immediately, while the rest is to be paid in annual, interest-freeinstallments. Micron was already acting as Elpida’s financial sponsor since May 2012, a fewmonths after Elpida filed for bankruptcy, in February 2012. This move will position Micronas the second largest memory company after Samsung. With the acquisition, Micron alsogains significant presence in the mobile DRAM market where currently it is not ameaningful player.I. B2. Major IssuesIndustry: The DRAM industry is generally an unfavorable one, with intense rivalry and atrend of commoditization that makes it difficult for player to compete. The fact thatincumbents are relatively protected from new entrants (due to the high barriers to entry)is hardly helpful for survival. The costs to build a fab and to make it fully functional areabove $6B, excluding R&D. At the same time, the Total Addressable Market (TAM) forDRAM products is estimated at only $25B. The intense technology race is currently slowedsomewhat by difficulties in achieving the next technology node level. This, on one hand,represents an opportunity to close gaps between competitors. On the other hand, anyplayer that is not yet engaged in the efforts to go up to the next level will find itself in adisadvantage in 2-3 years. 10
    • Competition: The industry is highly concentrated, with the above mentioned fourcompanies representing 91% of the market. Samsung is the strongest competitor with twomain factors that play to its advantage – forward integration into mobile devices andconsumer electronics, and a positive feedback loop of investments in future technology thatenable lower costs, higher margins, and better profits, which are, in turn, invested back intechnology. Those factors help Samsung remain profitable even in the downturns of thesemiconductor cycle. Hynix is the second largest competitor. Hynix experienced sharpswings in profitability in recent years, yet it currently holds a strong position with mobiledevices manufacturers in China. Elpida is a DRAM-only company with the third largestmarket share in DRAM. It is known for its low-power, high-quality mobile DRAM products,and it is Apple’s main supplier of DRAM. It holds a strong technological position, but theexpenditures that were required to achieve that position burdened its debt level to thepoint of bankruptcy. Micron held the fourth largest market share in DRAM. It is positionedwell in server and specialty DRAM, but lacks presence in mobile DRAM, which is the fastestgrowing and most profitable segment. In the current market dynamics, Samsung is theonly competitor that holds sustainable advantages and is relatively secure in its position.The other competitors are playing a technology catch-up game with Samsung and trying tocreate value by appealing to market niches.I. B3. Key AnalysisOur analysis shows that acquiring Elpida is a good move for Micron. The acquisitionsuccessfully withstands various tests, such as “Ally or Acquire” and Porter’s three tests. Inaddition, our DCF model shows that in the “Most Likely Case” and in the “Best Case”scenarios, the value of the combined entity is greater than the value of each companystandalone. The synergies are derived mainly from three areas: 1) Revenue – with Elpida’smobile DRAM capabilities, we assume that Micron will ramp up production of mobileDRAM, thus increasing revenue of the combined company, 2) Cost of Goods – Elpidaachieved a more advanced technology node than Micron. We assume that Micron will usethe knowledge from Elpida to migrate its fabs to a higher node, thus improving its COGS (ahigher node means more chips on each wafer, so the cost of each chip is lower) andprofitability, and 3) Capital Expenditures – with the acquisition of Elpida, Micron is 11
    • essentially buying two operational fabs at about a third of the cost of building one fab in thesame technology node.From a Value Minus Cost perspective, the combined company offers higher value andimproved costs over each company standalone. Micron was a negligible force in the mobileDRAM space, but, with the acquisition of Elpida, it strengthens its offering and inheritscoveted customers. Micron can leverage its mobile offering further by bundling its NANDflash products with Elpida’s DRAM, an offering that is quite valuable to mobile customers.Server and Specialty DRAM will also benefit from the technological expertise that Elpidaoffers.I. B4. Final RecommendationIn order to reap the most benefit from the acquisition, Micron has to act fast. In the short-term, its efforts need to concentrate on three main areas: 1) Integrate Elpida quickly intoMicron, to allow Micron the most control over Elpida’s operations, 2) Improve its productmix, preferably towards the more profitable mobile DRAM, and 3) Migrate Elpida’sadvanced technology into Micron’s fabs to achieve better COGS.In the long term, we believe that the key to remain competitive in this market is to breakSamsung’s positive feedback loop, or find a way to imitate it to compete on the same level.Micron is not capable of doing it by itself, so we suggest three non-mutually-exclusivealternatives: 1) A merger with Hynix, 2) Getting acquired by Apple, which has a strongincentive to limit Samsung’s growth, and 3) Develop the next generation of DRAM productstogether with Intel, in a similar fashion that was implemented for their NAND joint venture– IMFT. Intel has equity stake in the sole manufacturer of the equipment that is requiredfor the next technology node, and it can help Micron get better access to that criticalresource. Intel will benefit from the partnership by limiting Samsung’s growth, and bymaking sure that it has the complementary DRAM needed for its Atom mobile processor. 12
    • II. EXTERNAL ANALYSISII. A. Industry DefinitionMicron competes directly in the Memory Chip & Module Manufacturing (“Memory”)industry (Hoovers, 2012). This industry is part of the broader Semiconductor and RelatedDevice Manufacturing (NAICS: 334413) industry, where players engage in themanufacturing of semiconductor and related devices parts (IBISWorld, 2012). TheMemory industry (see Exhibit 1) focuses primarily on the design and manufacturing ofmemory components with diverse applications in personal computers, networking,storage, mobile telecommunications and consumer electronics products. Given the natureof Elpida’s position in the specific DRAM market, this analysis will focus on the DRAMsegment of the Memory industry.II. B. Six Forces AnalysisII. B1. Level One AnalysisExhibit 2 contains a Level One Analysis for the DRAM industry.II. B2. Level Two AnalysisThreat of Entry/Barriers to EntryThe high fixed costs (time and money) are a large deterrent to market entry. A firmwould require two years to build a facility and another one or two years to rampmemory production. This increasing cost is exceptionally prohibitive given theaverage DRAM TAM that has remained at about $25B since 2000 (Credit AgricoleSecurities, 2012). The combination of unpredictable long-term market developmentsand a tendency for the incumbent firms to oversupply the DRAM market is also adeterrent to market entry. The incumbent advantages owned by the largest fourplayers span broad product portfolios covering various markets. These firms sharetheir large patent portfolio over cross-licensing agreements, as well as form a linkageof intellectual property and know-how that a new firm would need to overcome ifentering the market.Threat of Rivalry 13
    • The DRAM industry is mature and highly concentrated (CR4 = 91%), and it is growing at adecreasing rate. In addition, firms employ similar technological processes to manufacturetheir products, as there is a strong dependence of DRAM capacity as a driver for revenue(see Exhibit 3), as opposed to firms gaining share through differentiated offerings. Thosethat are unable to maintain steady R&D and process investments are eventually pushed outby lower cost and more technologically advanced competition. Exhibit 4 identifies theconstant race for firms to achieve cutting-edge cost process nodes in order to maintain acompetitive variable cost structure. While each technology node reduces the variable costsper product the increasingly higher levels of investments raises the overall break-evenpoint requiring the firm to sell even more DRAM memory. Despite the strong requirementto commoditize in the PC space, DRAM firms are seeking ways to differentiate withincustomer segments in order to raise Average Selling Prices (ASPs) and attract higherrevenues.Threat of Suppliers/Supplier PowerDRAM buyers are a small percentage (11.6%) of the total semiconductor buyer group. TheCR1 of the key supplier categories is greater than 75%, each nearly forming a monopoly.These equipment categories face high fixed costs and long-term support, requiring them toserve a large majority of the market in order to stay profitable, and creating high (and nearimpossible) switching costs for equipment buyers due to suppliers’ high concentration.DRAM firms typically require 3-4 years from developing their semiconductor process untilproduction ramp up, further increasing their dependence on equipment availability andsupport from suppliers. Other forms of supply (labor, utilities, shipping, and financing) areconsidered easily attainable in most geographic locations; however, their impact is notconsidered to counter-weight the unfavorable forces of equipment suppliers.Threat of Buyers/Buyer PowerPCs and Notebooks [40% Market Share]: PC and notebook manufacturers place the highestcost pressure on DRAM firms and face low switching costs due to standardized interfacesand low requirements for differentiation. A main driver for these firms is cost of goodsgiven the low gross margins and low differentiation among computers and laptops. 14
    • Mobile Devices (Tablets & Smart Phones) [20% Market Share]: Mobile tablets andsmartphones are a growing segment with a medium level of concentration (CR4 = 58%).Mobile DRAM products are more differentiated, with mobile buyers valuing small size, lowpower, reliability, and ample manufacturing capacity. DRAM firms may reduce switchingcosts by providing ample manufacturing capacity and leading edge technologies.Servers [15% Market Share]: Servers represent the highest concentration ratio (CR4 =78%) of the buyers segment. These customers differentiate DRAM based on speed, lowlatency, and high reliability. Switching costs are slightly higher than in Mobile DRAM giventhe efforts that server vendors spend in quality DRAM products for long-term reliability.Despite their higher consumptions of DRAM (24-48GB/server), DRAM total share ofproduct costs is close to10%.Specialty Memory [5% Market Share]: The specialty memory market is believed to be themost attractive group given its high differentiation and relaxed focus on powerconsumption or size. These firms enable high switching costs by favoring DRAM productsthat are promised to be in production for long periods of time and are qualified for highreliability across increased temperature ranges. This market is thought to have high grossmargins, leading to overall favorable buyer power conditions for this segment.Summary: Despite high concentration and general pressure placed on DRAM ASPs, theDRAM firms have found opportunities to raise switching costs based on differentiation thatrepresents value to the various buyer groups.Threat of SubstitutesNew, non-volatile high speed memory technologies are in development, yet they have notreached a level of performance that can disrupt the DRAM industry. Micron has launched aversion of RRAM (Resistive Random Access Memory) called PCM (Phase Change Memory)on their 45nm process. The memory is in low-volume production and still lags inperformance (speed and bandwidth) compared to DRAM.Role of ComplementsDRAM is required in all consumer electronics; nonetheless, the value-added and pull-through are determined by the NAND and CPU components. The high switching costs for 15
    • CPUs in the form of both hardware and software redesign is beneficial to the DRAMindustry. Also, while NAND itself has a low switching cost, memory firms that sell bothtypes of memory (e.g. Samsung, Hynix, Micron) have developed low-profile high-performance multichip packaging (MCP) solutions that increase overall value in the mobilemarket. An unfavorable factor comes from the capabilities of NAND and CPU firms to haveequipment and technology know-how to enter the DRAM market if industry conditions areto improve.II. B3. Level Three Analysis Force Affecting Profitability Strength RankThreat of Rivalry Moderately Unfavorable 4.5 1Barriers to Entry Favorable 1 2Buyer Power Neutral 2.5 4Supplier Power Unfavorable 5 3Threat of Substitutes Moderately Favorable 2 6Role of Complements Moderately Unfavorable 4 5Overall Industry MODERATELY 4 N/AAttractiveness UNFAVORABLEDRAM firms face unfavorable forces through intense rivalry and threats from both supplierand complement groups. The incumbents continuously battle for high volume sales neededto generate the cash flow to fund an intense technology race. Further exacerbating thisrivalry, from the equipment supplier side, is the low percentage (11.6%) of semiconductorequipment purchased by the DRAM industry as compared to other semiconductorindustries, leading to longer equipment lead times and higher capital costs.Fixed costs and lead times required for most firms to enter the DRAM industry are high andcontain significant long-term market risk. In addition, many firms that createcomplementary products (e.g. CPUs) arguably possess know-how and semiconductorequipment required to move into the DRAM space. Given the higher profits obtained fromthese other products, it is clear that these firms are choosing to stay out of DRAM unlessmarket conditions are to improve. DRAM firms have been able to improve traditionally low 16
    • switching costs in three (mobile, server, specialty memory) of the four buyer groupsthrough differentiating features or product strategies.II. C. Macro Environmental Forces Analysis, Economic Trends and Ethical ConcernsII. C1. GlobalThe Great IT Demand ShiftYear 2011 was noted as the first year where mobile device shipments (552M) exceededthat of notebooks and PCs (365M), as identified in Exhibit 5. This cross-over point hasbeen labeled “The Great IT Shift” noting a paradigm shift as consumer values change fromhigh computing performance to long battery life and constant high-speed connectivity(Nomura Equity Research, 2012). Mobile devices are expected to continue their highgrowth to 1,800 million units in 2014 as compared to 600 million units for notebooks andPCs. DRAM production for 2012 has also accounted for this shift with computer DRAMproduction dropping below 50%.Explosion of Data ContentThe advent of social networking along with tablets and smart phones is leading a sharpincrease in data traffic – from 200 EB (billion gigabytes) in 2001 to a projected 55,000 EBin 2013. This increase has driven demand for servers and server DRAM. Exhibit 6identifies both the growth in traffic and notable events driving increased demand, includingthe advent of YouTube (2004), Facebook (2005), Android 2.0 mobile operating system(2009), iPad (2010), and Netflix Streaming over mobile devices (2011). Overall mobiletraffic usage is growing as forecasted to a CAGR of 78% from 2011 to 2016 (CISCO, 2012).Shift Away from PC DevelopmentMicrosoft’s Windows 8 release has disappointed the PC DRAM industry. Now centeredtowards a tablet platform, the new operating system will not require an increase above thecurrent 2GB DRAM typically used in computers. This is a sharp contrast to the mid-1990sand early 2000s, when each new release of Windows required increased DRAM needs inPCs. 17
    • II. C2. SocialSocial MediaSocial networks such as Facebook, Twitter and LinkedIn are training the youngergenerations to be permanently online and are driving the fast growth ofgaming/video/texting-capable mobile terminals, i.e., smartphones and tablets. Thesedevices require increasing amounts of DRAM to support their increasingly powerfulprocessors, networking, and audio-visual chips. If social networking ever proves to be afad, the growth rate of the memory industry will be affected.II. C3. TechnologicalDRAM-to-NAND FlexibilityThough it is cheaper to build a new higher-technology foundry than to refit an older one,foundries are somewhat flexible in converting production from one product to another.For example, responding to the NAND over-supply problems of 2012, Samsung isconverting its “Line 14” plant in Korea from 28 nm NAND to 28 nm Logic circuitmanufacturing (Lapedus, 2012). Micron’s purchase of Elpida’s DRAM fabs in Japan andSingapore is not a pure DRAM play, since the fabs can always be converted to NAND or NORproduction, albeit with some costs and down-time.Move Towards 450 mm (18”) WafersThe 300 mm (12”) wafer has ramped up now in newer foundries across the globe. Themove to 450 mm wafers will be the core of planned or under-construction plants, expectedto start production in 2017, at the earliest. Intel leads the investments, followed byGlobalFoundries and TSMC. 37% of wafers produced in 2012 are still 200 mm. This moveis expected to lower the variable costs of memory production by 30-40%. (Pajjuri, Heller, &Goodman, 2012).Long Lead TimeManufacturers and designers typically plan their multi-billion dollar investments to targeteconomic sweet spots 2-4 years in advance. Intel, GlobalFoundries, Samsung, and TSMChave made public 2015 plans for 14 nm process manufacturing. These plans depend ontools and technologies still under development, with no guarantee of their fruition or final 18
    • wafers/hour or yield/wafer results. This high-risk nature of the field has been the case fordecades and all players have got comfortable planning that far ahead.Intel’s DominanceIntel’s x86 CPUs are threatened by the emergence of ARM processors in mobile and tabletdevices. Tablets are cannibalizing laptops/netbooks, and increased power of the cheaperlow-power ARM processors will eventually threaten the x86 in PCs and servers. (CreditAgricole Securities, 2012)II. C4. Governmental/PoliticalLocal GenerositySemiconductor manufacturing is considered a matter of national security by manygovernments across the globe. It is also a creator of mass high-paying jobs where foundriesare located. Generous tax and credit support is furnished by governments to luremanufacturers to build their foundries locally. For example, NY State has committed morethan $1.2B in cash and tax breaks to GlobalFoundries (spin-off of AMD) to build a researchand manufacturing facility at Luther Forest Technology Campus (Kerr, 2011). Companiestypically auction their future plans to squeeze the most generous support from competingstates/regions. Hynix was bailed out by the Korean government in 2001, without seriouslegal challenges from its competitors.Need for LobbyingAnti-trust lawsuits, anti-dumping policies, and penalties for collusion vary from onecountry and government to another. The solar industry just witnessed a big win forAmerican manufacturers against their Chinese counterparts that were long known to beflooding the market – aided with different forms of Chinese government subsidies – leadingto huge tariffs and shifts in the market. Similar incidents has happened in the memoryindustry – Chinese dumping of DRAM in the 1980s – forcing current players to be involvedin lobbying and political campaigns, and to diversify their plant locations and suppliers.Chinese PoliticsConcentration of manufacturing in China is exposing the whole supply-chain to anypolitical instability in China. Foxconn, a contract manufacturer of electronics that employs 19
    • 1.2 million in China, was heavily criticized by labor groups in 2010 after several workersjumped to their death (Lorraine, 2012). Deceleration of Chinese GDP growth to 7.8% isadding more risk to the industry, and might potentially cost the survival of less diversifiedmanufacturers.II. C5. EthicalEnvironmental PollutionSemiconductor industry is a major contributor to environmental pollution in a number ofways. Fabrication can lead to river and soil contamination, as proved by numerous studies(Angela Yu-Chen Lin, 2009). Old integrated circuits (ICs) are very toxic if disposed of inlandfills. The rise of solar power has accelerated the growth of silicon recyclingtechnologies that recover gold and other expensive and toxic elements from obsolete chips,while using re-processed silicon for use in solar panels.Inhumane RecyclingThe silicon scrapping and recycling industry, while beneficial to the environment, is nowbeing scrutinized for its own dependence on “e-waste” export to poor countries like Indiaand Nigeria, where labor is heavily supplied by children in dangerous facilities. The West isturning more towards local e-waste management. For instance, the “Electronic WasteRecycling Act”, in effect in California since 2003, requires consumers to pay a recycling feefor certain types of electronics. This added fee is redirected to qualified companies thatrecycle silicon products and is becoming part of the total cost of ownership of electronics,whether paid by the producer as cost, or by the consumer as added price (Government ofCalifornia, 2012).Water ConsumptionA foundry consumes pure water (for rinsing chemicals) corresponding to a small city of40,000 to 50,000 inhabitants. New technologies are emerging to minimize the need forpure water (Yan, Dhane, Vermeire, & Shadman, 2009), thus having less impact on theenvironment. Technology is allowing less environmental impact for semiconductormanufacturing, in return for slightly higher COGS. Micron and most of its competitors 20
    • acknowledge the increasing costs to meet the environmental regulations and laws relatedto health and safety.II. C6. Macroeconomic TrendsShaky Economic RecoveryBy Q2 2012, the U.S. economy is growing at a 1.3% rate, barely recovering from the 2008Great Recession. Europe is still unable to convince its members to forfeit their fiscalsovereignty – a needed step before bailing out its weaker economies. Growth in China hasslowed down to 7.8% and the world is worried about another credit bubble busting inChinese construction loans. The world’s central bankers are running out of ammunitionafter 4 years of credit easing, while governments will be forced to tighten their budgets toavoid credit downgrading. The world economy is unstable, directly affecting the overalldemand for consumer electronics, and, consequently, the demand for DRAM products.Made in AsiaWith Asia fast becoming the world’s factory, semiconductor and electronics manufacturingecosystems are creating barriers to entry in other regions of the world. Supply chain Asiandominance is exposing the market to shocks. For example, the supply of NAND Solid-StateDrives was directly affected by the flood that hit Thailand (where half of the HDD parts aremanufactured) in 2011 (Deloitte, 2012). Similarly, the Tsunami in Japan offered anotherexample of supply disruptions caused by concentration of suppliers in that region.II. C7. Demographic TrendsWith the fast aging of the Asian Tigers, the demographic dividend enjoyed by the currentcenters of semiconductor manufacturing will run out. China’s median age is expected togrow from 35 to 45 years by 2035. Manufacturers will find skilled labor in shorter supply,will need to pay more taxes, and will face a less welcoming environment for import labor,affecting the overall production cost advantage seen within this region.II. D. Competitor AnalysisII. D1. Firm’s Competitors 21
    • The DRAM industry has consolidated from around twenty players in the first half of the1990s to eight players (four major and four minor) in 2012 (Nomura Equity Research,2012). The four major companies – namely, Samsung, Hynix, Elpida, and Micron – supplied85% of DRAM products globally in 2011, and this number expected to grow to 91% in2012. Consequently, the market share of smaller firms keeps declining.In 2011, Samsung’s market share was 37%, Hynix’s was 22%, Elpida’s was 18%, andMicron’s was 9%. In 2012, Hynix and Micron are expected to increase their market shareto 27% and 11% respectively, taking market share away from the smaller players – NanyaTechnology Corp. (Nanya), Powerchip Technology Corp. (Powerchip), Winbond ElectronicsCorp. (Winbond), and ProMOS Technologies (ProMOS). ProMOS is expected to exit theDRAM market completely, Powerchip and Winbond are expected to supply less than 0.5%of total DRAM shipments, and Nanya will keep a steady market share of 5-5.5% (NomuraEquity Research, 2012).II. D2. Primary CompetitorsAs indicated above, Samsung, Hynix, and Elpida represent the three primary competitors ofMicron in the DRAM market. All three companies and Micron itself will be included in theanalysis of competitors below.SamsungSamsung is a major player in two main business areas: 1) Consumer Electronics (referredto as “Set Business”), where it develops, manufactures and sells a wide range of products,such as smartphones, tablets, cameras, and home appliances, and 2) Semiconductors(referred to as “Component Business”), where it develops, manufactures and sells a varietyof memory chips, logic components, and image sensors, as well as LCD products.Samsung developed its first DRAM product in 1983, making South Korea the third countryin the world after the U.S. and Japan to produce DRAM chips. In the ten years that followed,Samsung climbed its way up to become the leading supplier of DRAM, reaching a 14%market share in 1994. Research shows that Samsung mastered product design and processdesign at the same time, helping the company achieve shorter product life cycles andshorter time to market. As a result, it gained higher profits by being first to market and 22
    • improved costs faster than competitors (Woojai Kim, 2004). This capability plays toSamsung’s benefit to this day. In 2011, Samsung’s market share in DRAM was 37%. Thecompany is forward integrated, which means that its semiconductors products arecomponents in its consumer electronics products. In that same year, 48% of thesemiconductors that were manufactured by Samsung were used in-house (Samsung,2011).HynixHynix was founded in 1983 as “Hyundai Electronics Industries”, the electronics arm of theHyundai conglomerate. In 1999, it acquired LG Semicon (the semiconductor unit of LGGroup) and created a meaningful force in the memory market. In 2001, the companydisaffiliated itself from Hyundai and changed its name to Hynix Semiconductor (Hoovers,2012). In February 2012, SK Telecom acquired a majority stake in Hynix, making it a partof SK group and giving it a much needed injection of capital, after more than a decade offinancial woos and swings from profits to losses. Hynix develops, manufactures, and sellsmemory products in the DRAM and NAND markets. It is the second largest manufacturer ofDRAM products with 22% market share in 2011, a share that is expected to grow to 27% in2012 (Nomura Equity Research, 2012).ElpidaElpida was founded in 1999 by combining the DRAM units of electronics giants NEC andHitachi. In 2003, Elpida acquired the DRAM operations from Mitsubishi Electric Corp. Thefirm specializes in the manufacturing of DRAM products and, as of 2011, holds 18% marketshare, only behind Samsung and Hynix (Nomura Equity Research, 2012). Elpida is knownfor its advanced process engineering capabilities, which has allowed the company to skiptechnology generations from 60nm DRAM to 40nm and to spearhead the move to 30nmDRAM. However, the combination of volatile DRAM prices, lack of product diversity, andhuge R&D and capital investments brought the company to declare bankruptcy in February2012.MicronMicron was established in 1978 in Boise, Idaho. It started as a semiconductor design firm,later adding a manufacturing capability with funding from local potato farmers and 23
    • McDonald’s. In the 1980s, when Japanese manufacturers were dumping chips on the U.S. togain market share, Micron filed an antidumping petition, which resulted in theSemiconductor Trade Agreement between the U.S. and Japan.Micron expanded its operations by acquiring the DRAM business from Texas Instruments,in 1998, and Toshiba, in 2002. Still in 2002, Micron tried to acquire then ailing Hynix, butthe deal was not approved by Hynix’s directors. Over the years, Micron has made a fewattempts to diversify its portfolio – it had a PC business from 1995 to 2001, it had a flatpanel display division for a few years, and it developed and manufactured CMOS imagesensors with the acquisition of Photobit. Micron spun-off the imaging business in 2008. Allthose years, however, memory products remained as a core business (Hoovers, 2012). In2006, Micron diversified its memory offerings by entering into a joint venture with Intel todevelop NAND flash memory. Numonyx’s acquisition in 2010 added NOR to the portfolio.Micron is the fourth largest DRAM supplier, with a market share of 9% in 2011. This shareis expected to grow to 11% in 2012 (Nomura Equity Research, 2012). DRAM was Micron’sbest selling product for many years. In 2012, for the first time, NAND sales outpaced DRAMsales (Micron, 2012).II. D3. Primary Competitors’ Business Level and Corporate LevelStrategiesCorporate Level StrategyThe corporate level strategy of each firm was determined based on an analysis of the levelof granularity observed in the memory market. It was concluded that, although DRAMproducts can belong to different segments, they are often grouped under a single businessunit.Samsung: Samsung breaks down its revenue by product-based operating segments whichinclude Digital Media, Telecommunication, Semiconductor, and LCD. In 2011, Digital Mediaaccounted for 35% of the revenue, Telecommunications for 30%, Semiconductor for 19%and LCD for 16%. No further breakdown within the semiconductor segment was available.In Samung’s 2011 annual report, the CEO stated that the company has “maintained strongsynergy between our set and component business areas” (Samsung, 2011). Samsung, 24
    • therefore, can be classified as a related constrained corporation under Rumelt’sclassification.Hynix: In Q2 and Q3-2012, DRAM sales represented 75% and 70% of Hynix’s revenue,respectively. The other 25% and 20% came mostly from NAND sales (SK Hynix, 2012).This makes Hynix a dominant DRAM business according to Rumelt’s classification.However, growing demand for NAND may change the mix and make it a relatedconstrained corporation.Elpida: Elpida is a DRAM-only company; hence, it is classified as a dominant business.Micron: Micron supplies all types of memory, namely DRAM, NAND, and NOR. With DRAMrepresenting 39% of sales in 2012, NAND with 44% and NOR with 12%, Micron qualifies tothe definition of a related constrained corporation.Business Level StrategyThe business level strategy of the DRAM business of each competitor was determinedbased on the characteristics of the different DRAM products, which were combined underfour segments:1) PC/Notebook DRAM: DRAM chips used in PCs and notebooks are consideredcommoditized. Any PC manufacturer can buy PC DRAM from any DRAM supplier and therewill be no apparent difference in quality, operational and technical specifications.2) Mobile DRAM: Smartphone and tablet companies (such as Apple and Motorola) requirethat the DRAM used in their devices will be smaller in size and will consume less powerthan PC DRAM. A DRAM firm that wishes to supply mobile DRAM must be able to complywith different power requirements from different customers.3) Server DRAM: Server companies (such as HP and IBM) require higher quality standardsand have strict technical requirements regarding operating temperature range and speed.However, there is no differentiation among server DRAM products.4) Specialty DRAM: A bucket category that describes multiple uses of DRAM such as inconsumer electronics and appliances, automotive applications, and medical applications. 25
    • Another important factor in the analysis is that DRAM prices are determined by marketforces, and a single supplier has no power of price differentiation. On top of that, acompany that achieves economies of scale will not typically transfer the cost reduction tothe DRAM buyer, as this will erode its margins very quickly given that prices are inconstant decline.In light of the above segmentation and pricing scheme, it was concluded that all DRAMcompanies are employing a differentiation strategy (as opposed to low cost) according toPorter’s generic business level strategies. In addition, all firms have characteristics ofbroad differentiation in the PC DRAM business, and of focused differentiation in the otherDRAM segments. Because no single company supplies only one type of DRAM, allcompetitors employ a hybrid business level strategy.II. D4. How Competitors Achieve their Strategic PositionExhibit 7 presents a complete VRIO analysis of the four players. Following are the mainfindings from the analysis.SamsungSince 1994, Samsung has been the global leading supplier of DRAM products. Samsung’ssustainable leadership stems from two primary factors: 1) a positive feedback loop, fromearnings to R&D to sales and back to earnings, and 2) vertical integration.Positive Feedback Loop: Samsung entered the semiconductor business in the early 1980swhen it injected $100 million into developing its first DRAM product. It then acquiredtechnology from outside the company, and embarked on a rapid learning process thatresulted in outstanding product design and process design capabilities, and, ultimately,leading to advanced, high-quality DRAM products (Woojai Kim, 2004). This learningcapability, driven by injections of capital, is what keeps the company’s leadership positionto this day. In the last twenty years, Samsung has consistently been the first DRAMcompany to invest in the next technology node. This fact enables Samsung not only to bethe first to market with the new technology, but also to achieve production efficiencies andimproved yields before its competitors. As a result, Samsung has enjoyed higher margins 26
    • than competitors and greater profitability. Those profits are then invested back in R&D andcapital expenditures, and the positive feedback loop continues.Vertical Integration: Overall, semiconductor companies (including DRAM companies) face amultidimensional capacity planning problem. In the short term, they have to decide theirDRAM product mix, i.e., how many wafers to manufacture for each DRAM type. In themedium term, they have to assume how much will be produced from their young,immature, and low yields emerging DRAM lines. In the long term, they have to decidewhether or not to start investing in the next technology node and which node it will be,knowing that the cost to construct a new fab is more than $6B dollars and that it takes twoyears for the fab to be fully functional. All these decisions have to be made in a highlyuncertain and volatile environment. Vertical integration gives Samsung an edge over othercompetitors by making known some of the unknown – information about demand, futuremarket requirements, and product mix is readily available from in-house customers.Because those internal customers are leaders in their respective markets, Samsung is onthe right track to keep its technological leadership.HynixHynix is the second largest manufacturer of DRAM products, but in recent years it was notprofitable. The company experienced profitability and liquidity problems in the past andwas bailed out by the Korean government in 2001. Recently, in a strategic move that seemsto bear fruit, Hynix focused its marketing and sales efforts on Chinese smartphone makers,which Hynix predicts will account for 33% of global smartphone shipments in Q4-2013 (SKHynix, 2012). However, our VRIO analysis shows that Hynix does not currently hold asustainable competitive advantage.ElpidaElpida continues a long standing Japanese tradition of delivering high quality products tocustomers. The company has a strong presence in the mobile DRAM space, with areputation for its low power chips and innovative packaging solutions (GlobalData, 2012).Elpida’s contract to supply Apple with DRAM for the iPhone and iPad is considered highlyvaluable. However, none of its resources and capabilities provides the company with asustainable competitive advantage. 27
    • MicronMicron was able to survive in the DRAM market through acquisitions and strategicalliances that allowed it to diversify within the memory market and enhance itstechnological capabilities. Currently, however, Micron is at a disadvantage compared to itscompetitors in the mobile DRAM space, mainly because it did not upgrade its technology tobe on par with new mobile requirements. Ironically, Micron’s sustainable competitiveadvantage comes from its older technology fabs. Having kept the facilities and the know-how to support older products, Micron is now offering a “Product Longevity Program”, inwhich it guarantees to make products available for at least ten years. This valueproposition is appealing to many customers in the automotive, industrial, medical, andaerospace industries. The Product Longevity Program is part of Micron’s focus on specialtyDRAM, which carries higher margins.II. D5. Value Minus Cost AnalysisValueExhibit 8 shows a list of value drivers by segment and assigns scores to the primary playersacross all the drivers for each segment. A summary of this analysis is provided below.PC DRAM: As noted before, PC DRAM is commoditized and, as a result, all firms receivedsimilar value scores.Mobile DRAM: In mobile DRAM, important value drivers include power, size, as well asguaranteed supply, given the high growth rate this industry is experiencing. In thissegment, Elpida provides the highest value among competitors due to its strong reputationfor supplying low power, high quality DRAM products. One of Elpida’s most coveted assetsis its relationship with Apple, while its lacking capability is in bundling. Many mobilemanufacturers are starting to use packages that bundle DRAM and NAND. Elpida does nothave a NAND operation, hence is not able to bundle. Micron scored low on mobile becauseit is on an older technological node than its competitors, and is not able to meet the powerand speed requirements of mobile customers. Samsung and Hynix received similar valuescores. The fact that Samsung is forward integrated is affecting its score on guaranteed 28
    • capacity, under the assumption that its in-house needs will get higher priority over othercustomers in times of shortage.Server DRAM: Micron has only two competitors in the server DRAM space, since Elpidadoes not have an offering of this product. Samsung and Hynix both scored about 20%lower than Micron on their server DRAM capabilities, a segment which puts emphasis onDRAM’s speed and latency, but is less concerned about the size and power consumption.Micron has gained reputation in the server space by providing a special low-latency DRAMchip, and so far has developed good relationships with important customers, such as HPand IBM (Employee1, 2012) (Employee1, 2012).Specialty: All of Micron’s competitors scored 50% lower on specialty DRAM. A few yearsago, Micron made a strategic decision to go after the smaller, but higher margin segment ofspecialty DRAM. This segment is comprised of customers with a unique requirement: tokeep product life cycles longer than those typical of PC or mobile applications. Forexample, a DRAM used in a car computer can last ten years before the car company changesthe design of its computer. Micron has developed the capability to answer this specificneed, focusing primarily on automotive and industrial applications, as well as consumerelectronics.PriceDRAM ASPs are in constant decline. Specifically, between 2007 and 2008 prices took a divebecause of oversupply in the market, and then continued to decrease because of theeconomic crisis. From about $10/GB in the beginning of 2007 (Nomura Equity Research,2011), ASPs of PC/Notebook DRAM reached $0.9/GB in 2012 (Nomura Equity Research,2012).DRAM prices in all segments are determined by the market, which implies that all DRAMfirms sell their products for the same prices, whether it is by contract or by occasionalsales. The differentiation in prices comes from the segmentation according to the DRAMusage. PC/Notebook DRAM carry the lowest price. Mobile DRAM enjoys a 2.5x multiplierabove PC DRAM, Server DRAM enjoys a premium of 2x, and specialty DRAM carries apremium of 1.5x. 29
    • CostThe prohibitively high fixed costs that are required to build a fab were discussed in SectionII B – Six Forces Analysis. For the Value Minus Cost analysis, only variable costs wereconsidered. These costs are largely dependent on the technological node the company hasachieved. Historically, each new technology node, named after the line width that thelithography process was able to achieve, such as 60nm or 40nm, enabled doubling thenumber of transistors on a wafer. This resulted in reduced cost per transistor. The costreduction was not reduced to half because of low initial yields. As the manufacturerincreased its yields, margins improved.To determine the cost for each competitor, the node each one achieved for each of theDRAM segments was taken into account. The findings are summarized in Exhibit 9.Samsung enjoys a cost advantage in almost all segments due to its ability to jump to thenext node before its competitors. Micron and Hynix, both on older technology nodes, suffercurrently from a cost disadvantage. Elpida has already achieved the 2x nm technology, butits production mix in 2011 was mostly PC DRAM, for which margins are close to zero.Summary of Value Minus Cost AnalysisBecause prices are the same for all competitors in all DRAM segments, advantages ordisadvantages originate from the value that the company is capable of delivering tocustomers, as well as from costs. Following is a summary of each competitor’s position inthe V-C framework.Samsung: Samsung enjoys cost advantages across the board and is the only company thatturns a profit even in the low periods of the DRAM cycle. Samsung delivers comparablevalue to Hynix in the mobile and server DRAM. Overall, Samsung’s power comes from itsability to 1) be the first to market with new nodes, 2) ramp up production quickly, 3)improve quality faster than competitors, and 4) enjoy the higher margins that follow.Hynix: Hynix is at a cost disadvantage in the mobile and server DRAM. To stay competitive,it will have to catch up with the other competitors. However, Hynix delivers comparablevalues in PC/Notebook, mobile, and server DRAM. 30
    • Elpida: Elpida enjoys a cost advantage over Micron and Hynix in the PC/Notebook, mobile,and specialty DRAM segments. It has a slight value advantage in the mobile DRAM.Micron: Micron is at a cost disadvantage compared to Elpida and Samsung in the mobileand specialty DRAM. However, it delivers more value than competitors in the server andspecialty segments. Micron is behind its competitors in the lucrative mobile DRAMsegment. To stay competitive, it will have to catch up.II. D6. Comparative Financial AnalysisExhibit 10 provides the financial ratios for the four firms under analysis. The financialsratios are not specific to the DRAM market; instead, they reflect the overall company’sbusiness. For example, Samsung is well diversified and the financials include data for all ofits divisions. Samsung and Hynix have their fiscal year ending in December while Micron’sfiscal year ends in September and Elpida’s ends in March. No financial data for Elpida wasavailable after its 2011 annual report, so the comparative analysis does not include 2012.Based on the financial analysis, Samsung is in the best financial position, followed byMicron, Hynix and Elpida in that order.ProfitabilitySamsung has the best profitability among the competitors. It has a consistently high grossmargin and is the only competitor that earned a profit in each of the past five years. Itsstrong performance is attributed to the diversified corporate portfolio, where profits inother business units cover for losses in the semiconductor business. Elpida presented theworst profitability. In 2008 and 2011, its gross margin was negative and it suffered heavylosses. Micron and Hynix both presented uneven performance, but, in 2011, Micron wasmore profitable than Hynix.LiquidityMicron has the best liquidity ratios in the industry, thanks to low levels of current liabilitiesachieved by maintaining a high level of cash & equivalents, and a 60 days turnover onaccounts receivable. Samsung is also in a healthy position in respect to its currentliabilities. Elpida’s liquidity worsened significantly in the year leading to its bankruptcy.Hynix’s liquidity improved from its 2008 low. Samsung has a large cash position of about 31
    • $12.7B at the end of 2011. Hynix has the lowest levels of cash among the competitors.Surprisingly, Elpida had a cash reserve of $1.17B at the time it filed for bankruptcy.LeverageSamsung has the lowest leverage in the industry. Its debt to equity ratio was at 0.53 for2011. Micron’s debt to equity ratio shows a well-balanced leverage. Hynix has a muchhigher leverage than Micron. Elpida, which used debt to finance its capital investments,had the highest debt to equity ratio. Elpida’s high debt levels brought it to file forbankruptcy with $5.6B in liabilities. This was the largest ever bankruptcy by a Japanesemanufacturer (Reuters, 2012).EfficiencyMicron is the least efficient competitor. Its inventory turnover indicates the highestinventory levels and its days sales outstanding indicate that its customers consistently get60 days payment terms. Elpida’s payment collection is slightly better than Micron’s in mostyears. Hynix was able to outperform Samsung in some years in its turnover and DSO ratios.Capital ExpendituresCompetitors in the DRAM market watch each other carefully for evidence of increasedcapital expenditure, as those expenditures indicate a strategic move into newer technologynodes. For this reason, some companies do not disclose capital expenditures in theirfinancial reports, so this analysis was completed based on data from other sources.What stands out in the comparison of the competitors is that, during the years of thedownturn (2008 and 2009), Elpida significantly increased its capital expenditures, whileother competitors contracted. Because revenues in these years were low, Elpida had tofinance its expenditures with debt instruments, which eventually brought it to bankruptcyin the beginning of 2012.Another interesting fact is that none of the competitors ramped up its capital expendituresto levels comparable to 2007 levels. That year all competitors increased their capacity,which led to oversupply and even faster erosion of prices.II. D7. Implications of Competitor Analysis 32
    • In the current competitive dynamics, Hynix, Elpida, and Micron are all playing catch-up toSamsung, which is the strongest player in the market in all aspects – market share,technological capabilities, and financial position. However, the technological gaps areexpected to shrink in the medium range of 2-3 years, because the equipment required to goup to the next node is not mature enough yet (see Section II E4 – Competitive Dynamicsbelow). This can give all players an opportunity to level the playing field, given that theymake the required investments.Elpida’s bankruptcy creates expectations for further industry consolidation. This cancontribute to less oversupply and more stable prices, a fact that will help the remainingcompanies strengthen their position.Differentiation in this market is very challenging and all the players are trying to findniches where they can add value, like Micron in Specialty DRAM, and Hynix in the Chinesemobile market. Those positions, however, are fragile, and may not add significantly to thecompany’s economic contribution, so all players have to be able to also supply the massmarket.II. E. Intra-Industry AnalysisII. E1. Industry Evolution and Formation of Strategic GroupsDRAM’s original growth was fostered by investments from the U.S. defense industry andcold war efforts. From the 1970s until the early ‘80s, the DRAM industry was dominated byIntel, Micron, and seven other U.S. firms. Japanese firms later entered in the late 1980s andearly 1990s, outcompeting the U.S. firms with better patterns of investments and a closerelationship with their consumer customers in Japan. The majority of the U.S. firms wereforced to leave with only Texas Instruments (TI) and Micron remaining.Through the 1980s and 1990s, the main source of DRAM was derived from the PC marketand closely followed changes in PC sales. While the market showed an average $7B in salesin the early 1990s, it grew to an average $25B in the second half of the 1990s with twopeaks in 1995 ($42B) and 2000 ($32B) driven by new releases of the Windows operatingsystem which required increased computer DRAM and drove PC upgrades. 33
    • Korean memory firms successfully captured the peak of this boom in 1995, earning a totalof $5B more than total earned by other firms listed on the Korean Exchange at the time.These firms had aggressively entered into the market in the early 1990s, hiring American-trained Korean engineers and investing heavily during the Japanese economic downturn.Samsung licensed Micron’s DRAM IP and invested $1.2B to build their first fabricationfacilities (Mark & Ma, 2002). With a leading edge fabrication facility costing $500M tobuild, Samsung’s heavy investment helped it to quickly build a large share of capacity(Credit Agricole Securities, 2012).This success in the 1990s also led other Taiwanese firms, such as Nanya, Powerchip andWinbond, to enter the DRAM market, maintaining a total of 24 firms and offsetting the lossof U.S. firms exiting the industry. The entrance of these new firms grew DRAM supply toexceed demand leading to high levels of inventory and oversupply when the marketcrashed in 2001 (Mark & Ma, 2002).From the mid to late 1990s, the cost of competitive DRAM facilities jumped from $500M toover $2B, while the TAM stayed on average at $25B since year 2000. The higher costs ledto consolidations in the industry including Micron acquiring TI in 2001 (Mark & Ma, 2002).The exit in DRAM firms has notably been correlated to Samsung’s rising market share(Chung, Yamasaki, Ho, Marcello, & Hiraga, 2012).II. E2. Strategic Industry GroupsDRAM-Only FirmsThe DRAM-only strategic group includes Elpida, Inotera, and Nanya. These firms have lesscash flow and decided to best achieve economies of scale by focusing primarily on DRAM.They are more dependent on developing competitive and high-ASP DRAM products.Currently, only Elpida has achieved this position with a competitive 32nm mobile DRAMproduct where as Inotera and Nanya are one to two generations behind in technologydevelopment.Diversified Semiconductor SuppliersThis group began to emerge in 2004 with Micron, Hynix, and Samsung presenting their firstNAND flash products. Their portfolios now include two or more of the following: NAND 34
    • flash, NOR flash, CMOS image sensors, logic design, or end consumer products. Theincreased diversity in product portfolios can enable a more stable operating margin. Cashflow can also be generated from other semiconductor operations to pursue DRAM processdevelopment and capital investments. This strategic group can also utilize MCP solutionsto sell bundled solutions (e.g. Micron’s Memory Cube), increasing both customer value andresulting ASP.Forward Integrated SuppliersThe group is comprised of a single firm – Samsung – that has forward integrated intonumerous consumer products including smartphones, tablets, and laptops. Samsung isable to closely align its DRAM development, including product and capacity planning, withits consumer products. Similar to the “Diversified Semiconductor Group”, operational cashflow generated from other business units can be invested into DRAM capital investmentand R&D spending.II. E3. Mobility Barriers, Threats and OpportunitiesMobility BarriersDRAM-Only and Diversified Semiconductor Supplier: The high cost of R&D and capitalspending is a barrier for DRAM-Only suppliers to expand their semiconductor portfolio intoother products, such as NAND flash or CMOS image sensors. Micron had successfullygained a competitive standing in NAND through a co-development agreement with Intelstarting in 2006. Micron’s shared cost for this arrangement was $1.4B which is stillsignificant for cash-poor members of the DRAM Only group (Micron, 2012).Moving into the “Forward Integrated Supplier” Group: Recent buyer sentiment has shownthat Samsung’s forward integration has hurt its relationship within the mobile and serverbuyer groups. For example, Apple has recently announced that it is cutting back Samsung’sshare in its product line after a recent copyright trial (Ilbo, 2012). Apple’s share of themobile market in 2011 was 93.2 million iPhones (6% share) and 40 million iPads (62%share). Buyers in the server market have also expressed their hesitation to work withSamsung for fear that any collaboration weakens Samsung’s barrier to entry into serverproducts. Samsung’s forward integration therefore requires it not only to have cost- 35
    • competitive DRAM products, but also to maintain competitive smart phone and tabletofferings to overcome lost revenue opportunities (Vilches, 2012; Alexander, 2012).ThreatsASP Volatility in PC and Mobile Market: Vendors in the DRAM-Only group are moresensitive to falling PC DRAM ASPs. Both Nanya and Inotera posted a 90% loss in grossmargins due to DRAM demands. They have also had higher fixed costs due to producingDRAM on older technology nodes.Inventory shifts in DRAM supply may buoy PC DRAM ASPs, as firms in the DiversifiedSemiconductor Suppliers group (Hynix and Micron) shift their production away from PCDRAM. The increased mobile DRAM supply of 9% in 2011 to 15% in 2012 of total supplymay erode the 2-3x ASP premium commanded for this product (Nomura Equity Research,2012).II. E4. Competitive DynamicsCross-Licensing Agreements for All Strategic Groups: Micron received a net $160M fromcross-licensing agreements with Samsung during the 2012FY, with as much as $115Mattributed to DRAM intellectual property. Large firms within all buying groups are thoughtto demand dual-sourcing for all components forcing memory firms to license any productdifferentiator before that product is brought to market (MarketLine, 2012).Technology Migration: Extreme Ultraviolet Lithography (EUV) equipment is expected todelay a move to the 15nm node. (Trendforce, 2012) This delay is expected to allowmembers of the Diversified Semiconductor Suppliers group (Micron, Hynix) to catch up toSamsung in 2013 and 2014, narrowing Samsung’s cost-advantage. For example, whileHynix’s cost per gigabyte was 16% higher than that of Samsungs in 2011, this gap isexpected to narrow to 3% in 2012 and forecasted to reach parity in 2013. This opportunitymay be short-lived as Samsung is heavily investing in EUV equipment. This threat greatlyaffects the cash poor DRAM-Only segment that would face a 56% cost disadvantage if theyremain at the 32nm node, and a 26% disadvantage at the 22nm node when Samsung rampsto a 15nm DRAM process. 36
    • The fixed cost required to build a 22nm facility is $6B, while a 15nm facility is expected tobe much higher. The high technology cost and increased price competitiveness may forceDRAM firms in both DRAM-Only and Diversified Semiconductor Products to leave themarket (Pajjuri, Heller, & Goodman, 2012).II. E5. Firm’s Competitive PositionThe “Great IT Shift” is changing DRAM needs from PC to the server and mobile DRAMmarkets. Both smartphones and tablets are expected to exceed those of PCs and laptops by500% in 2015, shifting DRAM demand from commodity to more specialized low powermobile and highly reliable server components.Micron’s Competitive PositionMicron has done well to gain share in the server DRAM space, but it lacks the technologynode and supply to cater the mobile market. Failing to enter the mobile DRAM market nowmay lead to Hynix and Samsung forming a duopoly, which will lead to stronger, futurebarriers to entry. Additionally, increased mobile DRAM demand is expected to cannibalizedemand in the PC market thus reducing Micron’s achievable market share. To enter themobile DRAM segment and remain competitive in the server segment, Micron will need todevelop an attractive mobile DRAM offering that would include greater capacity and tomove from its 48nm to a lower-power and cost competitive 32nm or below technologynode.Elpida’s Competitive PositionElpida has attempted to ride the paradigm IT spending shift from PCs to mobile devices. Ithas developed a valued mobile DRAM product, but its capacity is still too heavily weightedin the commodity PC DRAM space. With 17% overall share in the DRAM market Elpida willalso struggle to expand into both the higher ASP mobile and server segments unless it canfurther expand its DRAM capacity.Micron & ElpidaMicron’s acquisition of Elpida will enable Micron to compete in the growing mobile andserver markets, placing it into second place to Samsung in DRAM production capacity.Having not forward integrated, the Micron/Elpida merger will appear to be a more 37
    • guaranteed offering of DRAM supply. With a more complete portfolio, Micron/Elpida willbe able to compete in both segments and offer bundled solutions using Elpida’s DRAM andMicron’s NAND flash products.II. F. Threats and Opportunities AnalysisLitigationDRAM firms have increasingly faced lawsuits on patent infringement and pricemanipulation. Patent litigation has primarily come from patent holding firms. Theselitigations can significantly damage firms’ reputation, and represent a financial burden thatwill adversely affect their bottom line (MarketLine, 2012).Liquidity CrisisWith volatility in DRAM pricing affecting operational cash flow, these firms are increasinglydependent on debt financing to continue their technology investments. The threat ofdefault within the European Union may freeze these firms access to credit.Chinese Semiconductor FirmsThe three DRAM strategic groups face the threat of Chinese firms entering this industry.China’s manufacturing industry has grown due to favorable manufacturing conditions: lowlabor costs, government support, and easy access to capital. This growth has beendampened from rising labor costs (due to inflation) and concerns over product quality.While China faces barriers to entry such as those described in Exhibit 2, it is consideredpossible for Chinese firms to acquire both the required know-how and to eventually catchup to the fast-paced DRAM industry (Park, 2012).II. G. Summary of External AnalysisOverall, the DRAM industry has evolved into a mature industry with increasedconsolidation and favorable barriers to entry for incumbents. All firms within the industrycompete to achieve higher volume sales based on increasingly lower cost DRAM products,in order to fuel expensive technology investments that will result in future cost leadership.This intense re-enforcing feedback loop has pushed numerous firms to leave the industryand has incentivized incumbents to oversupply the market even further reducing profits. 38
    • Elpida and other firms within the “DRAM Only” strategic groups are especially vulnerableto volatility of DRAM ASPs, since it is their sole source of operational cash flow.Recent social trends such as social networking and mobile computing have shifted buyerpower more favorably towards DRAM firms. These trends have shifted DRAM demandmore evenly towards mobile (low-power) and server (high reliability) components,reducing commodity PC DRAM to close to a 40% market share. This has resulted in firmsshifting towards a more favorable product mix emphasizing these segments which demanda higher price premium.Micron and other firms within the “Multiple Semiconductor Product” groups have alsoincreased their market value by building NAND flash that can be bundled with mobileDRAM. Through Elpida’s merger, Micron will be positioned with a competitive portfoliowith strengths in higher premium mobile, server, and specialty segments. It will alsocontrol over 25% of the total DRAM market capacity.III. INTERNAL ANALYSISPART 1 – MICRONIII. A. Business Definition/MissionMicron’s mission statement was best described by the CEO Mark Durcan in the pressrelease announcing Elpida’s acquisition: “We are creating the industry leading pure-playmemory company” (Micron, 2012). Micron strives to be the leader in memory products byserving all memory needs of every customer. Micron’s strategic decisions and actions inrecent years confirm this statement. Unlike Samsung, Micron is not forward integrated, soall of Micron’s capacity is available to its customers. It has also not diversified into othersemiconductor products, so all its efforts are geared towards improving its memoryproducts.III. B. Management StyleMuch of Micron’s organizational culture can be explained by its location in Boise, Idaho. Inits early days, Micron was a shoestring operation, funded by potato farmers and 39
    • McDonald’s. Neither did it have the support of experienced venture capitalists, nor anabundance of skilled workers to choose from, but it enjoyed lower costs for land, rent, andlabor. To this day, Micron is able to retain employees for long periods of time, due to lackof competition from other semiconductor companies in the nearby vicinity. As an example,17 out of 31 company executives have worked for Micron for 13 years or longer, and manyof them started at entry level positions in engineering or operations (Micron, 2012).From interviews with employees (Employee1, 2012; Employee2, 2012) and reviews onGlassdoor.com, Micron’s management style is highly centralized and dictated top-downfrom the headquarters in Boise. The company is described by many reviewers asconservative and reluctant to change. The culture is described as a “Good Ol’ Boys” type,meaning that top and middle management have formed a close-knit group, making it hardfor outsiders to break into. In large part, promotions also depend on each individual’sconnections to that group of managers.In general, reviewers on Glassdoor.com find the compensation package fair andcompetitive relative to alternatives in the area. Micron also pays for employees’ schoolingand higher education, and matches 401K contributions. Manufacturing personnel work inshifts of 12 hours for 3 or 4 days a week, alternating weeks and day/night schedules.Employees are compensated for both night shifts and over time.Engineers who posted reviews on Glassdoor.com report higher satisfaction levels thantechnicians, and describe Micron as a good company to start a career in and to gainvaluable experience. However, many others advise against staying long due to a lack ofclear career path and crippling office politics.III. C. Organization Structure, Controls and ValuesIII. C1. Organizational StructureStarting from Q2-2011, Micron has been organized in four main business units (BUs): 1)DRAM Solutions Group – a DRAM only business unit that sells to customers inPC/notebook, consumer electronics, server, and networking; 2) NAND Solutions Group – aNAND only business unit that sells to customers in data storage, portable music players,and handles IMFT (see partnerships section below); 3) Embedded Solutions Group – sells 40
    • DRAM, NAND and NOR to customers in automotive, industrial, consumer electronics,server, and networking; 4) Wireless Solutions Group – sells DRAM, NAND, and NOR tocustomers in the mobile space (Micron, 2011). This structure is a partial separation fromthe previous structure that was guided only by product line. The four BUs report to thepresident, and each has its own sales and marketing team (Employee2, 2012).Micron’s structure is a hybrid between the business oriented structure that was describedabove and geographical/functional structure. There are two country managers, one inItaly, following the acquisition of Numonyx, and one in Singapore, following the jointventure with Intel. Functional areas such as human resources, legal, finance, and IT reportto the CEO.As of August 2012, Micron had approximately 27,400 employees, of which 16,000 wereabroad, including 7,800 in Singapore, 3,400 in Italy, 2,200 in China, 1,100 in Israel and1,000 in Malaysia (Micron, 2012).III. C2. Organizational ControlsMicron’s board of directors is comprised of five independent directors and Micron’s CEO,Mark Durcan. The board has appointed three committees to oversee corporate governanceissues: 1) The audit committee works with Micron and its independent auditors to monitorthe integrity of the company’s financial reports; 2) The governance committee nominatesand appoints board members and oversees director compensation, 3) The compensationcommittee is responsible for monitoring executive compensation.From the interview with a Senior Quality Director (Employee2, 2012), who has worked forMicron for 29 years, we learned that performance reviews are done every six months. Atthe same time, he referred to those reviews as pure formality, since it is not taken seriouslyby either employees or managers. Interestingly, despite being a Quality Director, he wasnot aware of quality control programs or training, although Micron’s website boasts itselfas a company widely dedicated to quality.III. C3. Organizational ValuesInnovation 41
    • Micron refers to its engineers as “dreamers” and “visionaries” and emphasizes itsinnovation capabilities (Micron, 2012). Until 2007, Micron was among the top 10 patentrecipients in the U.S., and most recently have received awards on its memory chips design.In 2006, Micron launched Micron Ventures, an early stage equity investor in companieswhose technologies are salient to Micron’s strategic interests.Integrity and EthicsMicron continuously updates and reaffirms its ethics and compliance policies and practices.Micron operates a dedicated compliance hotline where employees can anonymously reportviolations of the company’s Code of Business Ethics. In addition, the Vice President of LegalAffairs acts also as a Chief Compliance Officer. Training programs had been developed andput in place regarding compliance and anti-bribery/corruption policies.Environmental PoliciesMicron uses lead in the manufacture of its products, but it offers lead-free or “green”products to customers who specifically request for them. Micron’s manufacturing processis lead-free and is able to offer “green” products to customers who ask for them. Greenproducts, according to Micron’s definition, adhere to standards of maximum trace amountsof harmful materials, such as Chlorine and Bromine. Micron makes an effort to reduce itswater consumption and recycles 70-80% of the water that is used in its manufacturingprocesses. An effort is also made to continuously reduce the amounts of chemicals that areused in those processes.QualityMicron received its ISO 9001 certification back in 1994, and it since has been renewedseveral times. Recently, the company made an effort to comply with the extended ISOstandard TS 16949, which details additional technical specifications and touches on supplychain management, delivery standards, and environmental stewardship.III. D. Strategic Position DefinitionIII. D1. Corporate LevelBusiness Portfolio 42
    • Micron’s core business is in memory products, which, in 2011, accounted for 95% ofMicron’s revenue. Within the memory business, DRAM accounted for 41% of revenue,NAND for 36%, and NOR for 18% (Micron, 2011). Recently, however, as it can be seenfrom the 2012 annual report, NAND sales (44% of revenue) surpassed DRAM sales (39% ofrevenue), indicating a shift in customer demand.The other 5% of Micron’s revenue comes from the company’s holdings in Aptina Imaging,which develops and manufactures CMOS image sensors, and from sales of photomasks,through a joint venture with Photronics Inc. by the name of M P Mask Technology Center.Rumelt’s ClassificationsAs mentioned in Section II D3 – Primary Competitors’ Business Level and Corporate LevelStrategies, Micron is a related constrained corporation. This classification is derived byMicron’s division into business units, each carrying strong ties with one another.Acquisitions, Mergers, and DivestmentsMicron has a rich history of growth by acquisitions which began in 1998 with theacquisition of Texas Instruments’ (TI) memory operations. The most recent DRAM relatedacquisition was in 2002, when Micron acquired Toshiba’s commodity DRAM operations.To gain insight into Micron’s acquisition strategy, we examined the two most recentacquisitions (Displaytech in 2009, and Numonyx in 2010), even though they are not DRAMrelated.Micron acquired Displaytech in May 2009 as part of its ongoing attempts to diversify thecompany’s portfolio outside the core memory business. Displaytech developed andproduced tiny projectors, referred to as “microdisplays”, which enable a smartphone to actlike a projector (BusinessWeek, 2009). An analysis of this acquisition, as shown in Exhibit11, shows that an equity alliance would have been a better strategic choice, mostly becauseof uncertain market conditions. As an affirmation to this conclusion, in August 2012,Micron sold its microdisplay business to a subsidiary of Citizen Japan (Citizen FinetechMiyota Co., Ltd., 2012).In February 2010, Micron acquired Numonyx B.V., a privately held flash-type memory chipsmaker that was founded in 2008 by Intel, STMicroelectronics, and Francisco Partners. The 43
    • goal of this acquisition was to strengthen Micron’s presence in the mobile NAND and NORmarkets. As shown in Exhibit 11, the acquisition was the right strategy, as it enabledMicron to become a one-stop-shop for memory products (Micron, 2010).PartnershipsPartnerships are also a key part of Micron’s strategy. On its website, the companyproclaims that “Over the years, we’ve learned that having key partnerships help make us abetter company. It’s allowed us to diversify our product portfolio, create a larger globalpresence and increase our manufacturing scale” (Micron, 2012). Micron is currentlyinvolved in four main partnerships which will be analyzed below. As in the case of theacquisitions, the partnerships are not necessarily related to Micron’s DRAM business, butthe analysis is still beneficial for gaining insight into the company’s overall strategy.In 2006, Intel and Micron formed a joint venture – IM Flash Technologies, LLC (IMFT) – toproduce NAND flash products for the two companies. Micron’s interest in IMFT is 51%, andit gets an equivalent percentage of revenue. R&D costs are generally split equally betweenMicron and Intel (Micron, 2011). Another NAND joint venture with Intel, IM FlashSingapore LLP, became wholly owned after Micron acquired the remaining 14% that didnot own. As presented in Exhibit 12, this partnership is valuable for both companies.In 2011, Micron had two DRAM joint ventures with Nanya called Inotera and MeiYa. Aspart of the agreement, the companies share development costs equally. In addition, Micronis receiving royalties from licensing technology to Nanya. Inotera accounted for 37% ofMicron’s DRAM gigabit production in Q4-2011. MeiYa was absorbed into Inotera during2012. The analysis presented in Exhibit 12 shows that the partnership faces risks, and thatan acquisition may have been a better strategic choice.Micron’s most successful venture into non-memory territories was with imagingtechnology. Micron added CMOS image sensors to its portfolio with the acquisition of theimaging business from Avago Technologies in 2006. Micron became the leading supplier ofCMOS image sensors and the product line accounted for 11% of the company’s sales in2008 (Hoovers, 2012). In March 2008, Micron spun-off its imaging business as anindependent entity under the name “Aptina”, and, in June 2009, it sold a majority interest 44
    • of 65% to Riverwood Capital and TPG Capital, turning Aptina into a privately heldcompany. Micron retained the remaining equity share of 35%. Micron’s then CEO, SteveAppleton, described the spin-off as a move that will allow each company to focus on itsrespective core business.Portfolio Analysis using the BCG MatrixAs illustrated in Exhibit 13, the company does not have a cash cow that it can count on forthe near or medium future. Because of fluctuations in demand and in selling prices, DRAM(Micron’s flagship product until recently) was never a typical cash cow, as it could not relyon it to deliver consistent good performance. Currently, NAND has the best prospects ofmarket growth, but it shares the same characteristics of uncertain demand and prices. InNOR, Micron is losing market share to one of its competitors, Spanion (iSuppli, 2012).Demand in this segment is also highly uncertain, and substitutes already exist. It isapparent from this analysis that Micron’s portfolio is risky and carries a lot of uncertaintywith it; however, this is the nature of the industry that Micron plays in.III. D2. Business LevelAs explained in Section II D3 - Primary Competitors’ Business Level and Corporate LevelStrategies, Micron implements a hybrid business strategy by catering to mass market needswith PC/Notebook DRAM, as well as to more specialized applications of DRAM, such asserver, automotive, and medical.III. D3. Resources & Capability LevelMicron’s Value Chain (see Exhibit 14) supports the classification of Micron’s business levelstrategy as a hybrid differentiation strategy. This is apparent by the existence of multiplevalue creating and cost reducing drivers. The analysis also reveals that many of thosedrivers are generic to the industry, with only a few that are truly unique to Micron, such asthe longevity and resell programs. This is typical for an industry that went through aprocess of commoditization over the years. For a deeper look into Micron’s value and costdrivers, refer to Section II D4 – How Competitors Achieve their Strategic Position, and forits V-C analysis, see Section II D5 – Value Minus Cost Analysis.III. E. Financial Analysis 45
    • Performance and Operating RatiosIn 2012, Micron reported revenue of $8.23 billion, a decrease of 6% from 2011. Sales wereattributed to the company’s following products: 44% to NAND flash (8% increase from theprevious year), 39% to DRAM (2% decrease from the previous year), 12% to NOR flash(6% decrease from the previous year), and 5% to other (unchanged from previous year).With the exception of 2009, revenue growth has shown consistent improvement in the pastfive years attesting to the appeal of Micron’s products in the memory market. However, thecompany’s weak financial performance is evidenced by a steady decrease in net income inthe last three years. Based on Micron’s most recent 10-K, operating margins haveweakened. Despite stronger margins in 2010 (~19%), margins have since then beensqueezed to 8.6% in 2011 and exceeded -7 % in 2012. This sharp decline could beassociated with inefficient cost management. Similarly, net income has dropped from$1.85B in 2010 to $167M in 2011, and a loss of $1B was reported for 2012.Although the entire industry has been struggling to remain profitable in a context of a sloweconomic recovery and rapidly falling prices of DRAM and NAND flash memory, Micron’sprofitability indicators have consistently remained below industry averages as observed inExhibit 21. However, Micron stands out from competitors in terms of R&D and capitalexpenditures, which indicates a commitment to develop advanced products and processesin order to maintain or improve its market position. In 2012, R&D and CapEx amounted to$1.69B and $618M, respectively. Exhibit 22 shows that Micron steadily maintained itsindustry lead in both domains with the exception of 2009 and 2010, when CapEx levelswere slightly lower than industry. As of August 2012, Micron holds $14.32B in total assets,of which $2.4B are in cash, $1.28B in receivables, and $1.81B in inventory. Liabilities seemwell controlled and amount to $5.9B as of the same date. Micron has a 5 year averagecurrent ratio of 2.28 and, therefore, is in a strong position to meet its short-termobligations even if a slight decrease from 2011 is observed. Overall, both debt and capitalremain at a reasonable level. The large cash balance and limited interest burden allow thecompany to face the volatility of the industry with moderate strength.Valuation 46
    • The Discounted Cash Flow (DCF) model yielded an Enterprise Value (EV) of approximately$5.5B for Micron (see Exhibit 23). This valuation assumes a growth rate of 4% which wasderived based on three factors: 1) industry trends, 2) Micron’s historical average growth,and 3) nominal GDP forecasts (see Exhibit 24 for details on Micron’s growth rateestimation). Further, it is assumed that the terminal growth rate for Micron will ultimatelybe in parity with nominal GDP growth, estimated to be at 4.5%. Other key components ofthe model (e.g. COGS, SG&A and R&D expenses, Depreciation, CapEx, and Restructuringcosts) were computed as percentages of revenue by assessing historical trends (see Exhibit25 for FCF component estimations). Finally, the Weighted Average Cost of Capital (WACC)reflects the company’s current costs of debt and equity (see details on WACC calculation inExhibit 26).PART 2 – ELPIDAIII. A. Business Definition/MissionThroughout the years, Elpida has taken a leading position alongside top DRAM companiesin the world, achieving the third highest share of the DRAM market. Its current statedmission is “to become the world’s No.1 DRAM company that contributes to the digitalinformation society by providing advanced, highly functional, high-performance DRAMproducts while maintaining cost competitive operations” (Elpida Memory Inc.).III. B. Management StyleThe original meaning of the word “Elpida,” namely “expectation” (of growth), suggests anaggressive management style driven by growth. By the virtue of being Japanese, it is alsopossible to assume Elpida as being a hierarchical company run by older executives whotypically stick with one or two companies for life. This can be evidenced by the fact that,even in the wake of the company’s recent bankruptcy, the “same senior managers who ranit into the ground still are at the helm, including the president as bankruptcy trustee”(Mallard, 2012). 47
    • When analyzing management’s role in Elpida’s failure, negative comments about itsexecutives abound. Bondholders have cited the actions of the president Yukio Sakamotowith regards to Elpida’s proposed sale to Micron as lacking “transparency” (Tibken, 2012).A user comment from an online article discussing Elpida’s failure indicates a culture“…governed by the old guards who grew up in the manufacturing-driven mentality, not themarket-driven mentality” (Cheng, 2012). Although small in number, these two examplesreveal a potential dissonance between what management preaches and what actually getsdone (see Section III C3 – Organizational Values).III. C. Organization Structure, Controls and ValuesIII. C1. Organizational StructureElpida’s organizational structure as of December 2011 is presented in Exhibit 15. Theorganization has a hybrid structure partly organized around core business activities (e.g.finance & accounting, sales & marketing, and general & administration), and partlyorganized by the different product divisions under the DRAM Business Unit. TheTechnology Development (TD) Office (name for Elpida’s R&D division in Taiwan) and theNew Memory Development Group, currently under the CEO, existed previously inside theDRAM unit. It is assumed that this change was driven by the need of a central functionresponsible for driving research and development of existing and new technologies, underthe direction of a Chief Technology Officer (CTO). Although not clear from the chart, the TDOffice oversees the different DRAM technologies used for each specialized market (e.g.Mobile and Computing).Taking all subsidiaries into account, Elpida had 5,800 employees as of March 2012, down98 employees from the previous fiscal year, while the number of Elpida-only employees is3,166, down 24 employees from the year before. In 2011, the average age of employeeswas 35.6 years old, and the number of service years averaged 6.29 (Elpida Memory Inc.,2011). The acquisition agreement with Micron calls for it to maintain Elpidas currentoperations and employees.III. C2. Organizational Controls 48
    • Elpida has defined several bodies and committees to promote corporate governance andensure that business activities are in full compliance with the laws, regulations and thecompany’s articles of incorporation (see Exhibit 16). Two important compliance-relatedpolicies have been set forth by the Risk Management and Compliance Committee to date:1) Elpida Code of Conduct, and 2) Internal Reporting "Compliance Helpline" System. Thefirst serves as a guideline of standards to be followed by all directors and employees, whilethe second provides an open forum by which employees can anonymously reportviolations to the Code.Elpida also defines and maintains internal controls related to information management (toensure confidentiality of business information) and environmental practices (to assess andreduce environment impacts from its operations).III. C3. Organizational ValuesElpida’s organizational values are stated as follows (Elpida Memory Inc.): 1. “We will create value added ideas with our customers by providing them world class leading edge technology and products. 2. We must demonstrate trust in the eyes of our employees, customers, shareholders, business partners and stakeholders. 3. We must construct a working environment which has a completely open door policy which enables each of our employees to develop and implement their original ideas.”These stated values suggest a company that place high focus on innovation, transparencyand trust. Indeed, the last two attributes are very typical of cultures where grouporientation, relationship and collaboration are of great importance. They are not merelyconcepts, but a way of life which permeates to all aspects of corporate work and at alllevels.Innovation at Elpida can be evidenced by the company’s financial commitment to R&D, andits ability to create new technologies that support the evolution of mobile devices andrespond to growth in demand. In 2012 alone, Elpida has been granted around 200 patents 49
    • as results of its product development capabilities and advanced process technology(PatentDocs).The company is also well known for its environmental principles and initiatives. In thatregards, Elpida’s vision has been to “proactively contribute to conserving energy andpreventing global warming throughout society, through the development and manufactureof sophisticated energy-saving semiconductor products” (Elpida Memory Inc., 2012). Thisvision is carried out by reducing environmental impacts throughout the product life cycle,and by pursuing eco-factories with high production and resource utilization efficiencies.For its continuous commitment to environment preservation through strict controlmeasures, Elpida has received various quality certifications (e.g. ISO9001and ISO14001)and awards, such as the “2009 Global Warming Prevention Activity Award" by the JapaneseMinistry of the Environment.III. D. Strategic Position DefinitionIII. D1. Corporate LevelBusiness PortfolioElpida’s core business is in DRAM memory products. Although the company does notintentionally disclose segment-related information in its financial reports, its productportfolio is generally classified into two main segments: Premier DRAM and ComputingDRAM (Elpida Memory Inc.). The Premier DRAM segment supplies DRAMs for the mobileand consumer electronics markets, serving functions such as recording and playing ofimages/videos. The Computing DRAM segment provides DRAMs for the low-cost,commodity PC market, as well as the server market, which utilizes reliable DRAMs in orderto handle large amounts of data and to operate over long periods of time.Rumelt’s ClassificationsAs mentioned in Section II D3 – Primary Competitors’ Business Level and Corporate LevelStrategies, Elpida is a DRAM-only player in the Memory industry. This fact classifiesElpida’s corporate strategy as a dominant business.Acquisitions, Mergers and Divestments 50
    • Elpida has made a few acquisitions to further improve its cost competitiveness andconsolidate its leading position in the DRAM market. In 2005, it agreed with Advantest,Kingston Technology and Powertech Technology Inc. (Powertech) on creating a new wafertesting company called Tera Probe. To gain more control of the company, in 2009, Elpidaacquired common shares of Tera Probe through an exchange of its non-voting shares,converting its ownership from an equity base into a consolidated subsidiary. Elpidabelieved that its majority ownership would enable it to achieve greater efficiencies and costreductions (Elpida Memory Inc., 2009).In a similar scheme, Elpida signed a joint venture with Powerchip in 2007, establishingRexchip Electronics Corporation (Rexchip) – a Taiwan-based manufacturing facility thatproduces DRAMs with superior cost-performance. Elpida’s stake in Rexchip reached 52%in 2008, and 65% in 2009, allowing Elpida to gain greater control over its management(Elpida Memory Inc., 2009). As part of Elpida’s pending acquisition, Micron has agreed tobuy the 24% stake held by Powerchip to retain a total of 89% ownership interest inRexchip (Elpida Memory Inc., 2012). It is expected that one of Rexchip’s factory beconverted to make NAND flash chips once Micron’s acquisition completes.PartnershipsElpida has also engaged in a number of other strategic alliances that have enabled thecompany to strengthen its product offerings and enhance its market share and revenue. In2010, Elpida, Powertech, and United Microelectronics Corporation (UMC) reached anagreement to deliver a 3D IC Logic + DRAM solution, by combining Elpidas capabilities inDRAM, Powertechs assembly expertise, and UMCs logic technologies. The resultingtechnology was “expected to improve cost competitiveness, improve logic yield, andaccelerate entry into the 3D IC market” (Elpida Memory Inc., 2010).Most recently in 2011, Elpida and PTC signed another agreement, under which Elpida willpurchase all DRAM products manufactured by Powertech (Elpida Memory Inc., 2011).Other strategic partnerships include the one with Walton Advanced Engineering, Inc, aTaiwanese company, to whom Elpida outsources its packing and testing of DRAMs fordigital consumer electronics. 51
    • It is apparent from its long history of partnerships that Elpida has been successful ingaining new technological differentiation and manufacturing capacity from the companiesit partners with. Similarly, Elpida has represented an attractive option for other companiesgiven its position as the sole Japanese DRAM manufacturer, as well as its advanced R&Dcapabilities.III. D2. Business LevelAs explained in Section II D3 – Primary Competitors’ Business Level and Corporate LevelStrategies, Elpida implements a hybrid business strategy by catering to mass market needswith PC/Notebook DRAM, as well as to more specialized application of DRAM, such asserver.III. D3. Resources & Capability LevelAs in the case of Micron, Elpida’s Value Chain (Exhibit 17) supports its business strategyclassification and share many value and cost drivers with other companies in the industry.However, Elpida has directed resources specifically to the mobile DRAM market, asapparent from its specialized development and support centers. For a deeper look intoElpida’s value and cost drivers, refer to Section II D4 – How Competitors Achieve theirStrategic Position, and for its V-C analysis, see Section II D5 – Value Minus Cost Analysis.III. E. Financial AnalysisPerformance and Operating RatiosAs the third largest DRAM manufacturer after Samsung and Hynix, Elpida holds a strongmarket position that is critical to sustaining its revenue. On its latest financial statementsof December 2011 (Q3FY11 in Japan), the company reported $2.6B in revenue, a sharp53% decrease from the previous fiscal year, when annual revenues had exceeded $5.6B.Clearly, its financial performance deteriorated in 2011 as a result of a decline in DRAMprices, lower demand for PCs, a fragile global economy and a stronger Japanese Yen, whichalso contributed to lower sales as exports slowed down. Consequently, a whopping net lossof $1.1B was reported in December 2011. This drastically contrasted with the profitmargin improvements of 2010 and 2009, which were highly welcomed by investors after a 52
    • period of gloomy performance. As indicated in Exhibit 27, Epida’s profitability ratiosduring the 2007-2011 timeframe have consistently remained far below industry averages.The company has clearly struggled to remain profitable while competing with other largeDRAM players. The fact that Elpida has recently not been able to earn the needed revenueto reverse profitability trends and to pay its debts has put the company in a very delicateposition vis-à-vis creditors. According to its latest quarterly report, the current ratio wasonly 0.68, reflecting potential issues in meeting short-term obligations, while the debt-to-equity ratio was 1.7, indicating an unhealthy amount of leverage even with solvency andleverage ratios historically higher than competitors (see Exhibit 10). In February 2012,Elpida sought protection from creditors, filing for bankruptcy for its massive $5B debt load.ValuationThe Discounted Cash Flow (DCF) model yielded an EV of approximately -$5.14B (seeExhibit 28). This valuation is based on a revenue growth rate of 3.3% (see Exhibit 29) andon historical averages for COGS, SG&A, R&D expenses, Depreciation, and CapEx, as shownin Exhibit 30. Depreciation was reduced by 60% (offer price of $2.5B is ~40% of Elpida’s$6.2B current net Plant Property & Equipment), and all debt was ignored, since thevaluation was conducted after bankruptcy. In light of a less robust financial position andhigher perception of risk, the WACC percentage used for Elpida was higher than the oneused for Micron. Due to lack of recent financial statements, Elpida’s base year was assumedto be 2011, the year in which the company published its last earnings release (December2011 is equivalent to Q3 according to Japanese’s fiscal year). Moreover, to convertfinancial statements from Yen to US dollars, yearly exchange rate averages provided by theIRS were used. As explained in Exhibit 31, merger with a bigger firm would provide Elpidawith scale and diversification needed to streamline its most significant valuation drivers:COGS and CAPEX. Its high WACC and susceptibility to currency fluctuations can also bemitigated as part of a bigger diversified company like Micron.IV. ANALYSIS OF THE EFFECTIVENESS OF THE STRATEGYIV. A. Is Acquisition the Right Move? 53
    • As a first step in analyzing Micron’s strategic move, we will utilize the appropriateframeworks for M&A situations as follows.IV. A1. Make vs. BuyThe Wireless Solutions Group – Micron’s business unit that sells to wireless customers –represents only 14% of Micron’s total revenue. Out of these 14%, only a part is attributedto DRAM. With mobile DRAM being the highest growing segment of all DRAM products,Micron would have to improve its presence in the mobile DRAM space to remaincompetitive. To develop that capability in-house, Micron would need to build a fab at a costof approximately $6.5B, increasing its debt significantly. In addition, it would take abouttwo years before the fab becomes operational and its yield is acceptable. Not only doesElpida offer a ready-to-use fab at the required technology node, but it also suppliescontracts with important customers. Acquiring Elpida will give Micron a “Make” capabilityof a strategic importance at a fraction of the costs of a new fab.IV. A2. Ally or AcquireAs seen in Exhibit 18, the recommendation of the “Ally or Acquire” framework is anacquisition.IV. A3. Porter’s TestsIndustry Attractiveness TestAs shown in Section II B – Six Forces Analysis, the DRAM industry is not a favorable one.However, both companies were already operating in that industry. The acquisition ofElpida by Micron is an example of a horizontal diversification, where the acquiringcompany adds products that appeal to the company’s current customer groups. By lookingat the specific segments being affected by this merger, we realize that Micron is actuallyadding capabilities to a currently favorable segment of the DRAM industry, which is themobile DRAM.Better-Off TestWe believe that both companies will be better-off following the acquisition. Elpida gains alifeline after its bankruptcy, while Micron gains state-of-the-art manufacturing facilities 54
    • that would otherwise require huge capital investments, as well as an increased share in themobile DRAM market. Expected synergies for the “Most Likely Case” scenario are detailedin Exhibit 32 and are further explained in Section IV C – M&A Valuation.Cost-of-Entry TestThe financial analysis and valuation of the companies indicate that in present value terms,the value of the combined entity is greater than the sum of values of the stand-aloneentities in the normal and best case scenarios (see section IV.D – M&A Valuation below).The worst case scenario results in a loss of value of about $4B for Micron. Anotherimportant factor which makes the cost-of-entry test favorable for Micron is the terms of theacquisition deal. Micron will pay $750M cash in the first year, and the rest will be paid inyearly interest-free installments over a 7 year period. Those terms mean that Micron willnot assume any debt as a result of the acquisition and will be able to finance it by usingcash flow generated from Elpida’s operations. In a hypothetical situation, Micron canreduce potential losses by shutting down Elpida’s foundries, thus avoiding payment ofsome of the installments.IV. B. Combined Resources and Capabilities, V-C, and Industry ConditionsAfter establishing that the acquisition is indeed the right move for Micron, we can furtheranalyze how the acquisition will improve Micron’s current position in DRAM, and how it isexpected to change the industry dynamics.The DRAM industry is expected to benefit from the acquisition. More consolidation meansless oversupply, especially in the PC/Notebook segment, as Micron diverts Elpida’s outputmostly to mobile DRAM. As a result, at least in the short term, prices are expected tostabilize in the PC/Notebook segment. The value offering that is provided to customers bythe combined entity is also expected to improve. The increased capacity will lower the riskof shortages of DRAM supply for mobile customers. The combined Value Minus Costanalysis (see Exhibit 19) assumes that, over time, Micron will be successful in absorbingElpida’s capabilities both in lower-cost process development and in high-quality memorydesign. The results show that the combined entity offers higher value than standaloneMicron or Elpida. Specifically in the server market, improved product design capabilities 55
    • are expected to increase the value significantly. On the cost side, the combined entity isexpected to enjoy improved costs once it migrates to the advanced tech node where Elpidais.A combined VRIO analysis (Exhibit 20) indicates Micron achieving a strong competitiveadvantage in bundled multi-chip-packaging, by utilizing Micron’s NAND flash and Elpida’sstrong brand. Elpida’s technology and experience using gas-powered power sources andenvironmentally friendly waste reduction may improve Micron’s position in the case offuture government regulations.IV. C. M&A ValuationThe synergies in Exhibit 32 are valuated under three distinct case scenarios whose detailsare explained below. Note that the predicted impacts of the synergies are relative toMicron’s base year of 2012. While it was observed that “EV(Micron) + EV(Elpida) > EV(MU+Elpida)” held true in the “Most Likely Case” and “Best Case” scenarios, it was not thecase for the “Worst Case” scenario. Exhibit 33 summarizes the valuation of those synergiesfor all scenarios.IV. C1. Most Likely Case ScenarioThe synergies are expected to trigger an increase in revenue growth of 1.5%, in addition tothe 4% growth forecasted for Micron in Exhibit 24. Due to an improved negotiating powerwith suppliers and to new manufacturing efficiencies, COGS are expected to drop by 2%.Similarly, as a result of higher operational efficiencies, SG&A is also expected to decrease by5%. The combined strong R&D focus of both companies is likely to yield a cross-fertilization of ideas. A 10% decrease in R&D is likely to occur as a result of resourcestrengthening and consolidation.Restructuring costs related to Elpida’s integration are assumed to be $500M and $250Mapplied over the first and second post-acquisition years, respectively. Finally, Capex as a %of Revenue is expected to decrease by 50% from 2013 through 2015 as Micron will notneed to make new PP&E investments. In light of these assumptions, we estimate thecombined valuation to be $9B (see Exhibit 34), of which $6.6B are attributable to synergies.IV. C2. Best Case Scenario 56
    • Revenue growth is expected to increase by 2% due to better than expected synergies.Considering a baseline growth rate of 4%, the resulting growth rate used for theprojections is 6%. Under this scenario, the impact on COGS is translated by a 3% reduction,assuming that Micron’s negotiation power with suppliers should improve even more. It isassumed that SG&A and R&D expenses will experience decreases of 7% and 15%respectively. These decreases are directly linked to better than expected operationalefficiencies, as well as higher levels of resource utilization and consolidation. Restructuringcosts for facilitating the integration of Elpida are assumed to be the same as in the previousscenario; therefore, CapEx as a % of revenue is also expected to decrease by 50% for thethree coming years, after which it should return to the levels observed in the in Micron’sstandalone valuation. Based on these assumptions, we forecast a combined valuation of$14.02B (see Exhibit 35), of which $11.62B relate to synergies.IV. C3. Worst Case ScenarioIf size negatively affects performance of the combined firm, or if Micron fails to implementthe changes in product mix, revenue growth is likely to shrink by 0.3%, therefore reducingthe combined-firm growth rate to 3.7%. A decrease of only 1% in COGS is factored in toaccount for weaker than expected bargaining power against suppliers. SG&A expendituresare expected to decrease by only 3%, while R&D expenditures would drop by only 5%.Both cases indicate integration challenges that hinder efficiencies, resource consolidationand utilization. As in the other two scenarios, CapEx is not expected to be impacted byworse than expected synergies. The assumption that Micron decreases CapEx as a % ofrevenue by 50% remains valid for the next three years, as the company plans to focus onthe adaptation and utilization of Elpida’s manufacturing facilities. Note that a 6% tax rateadjustment was applied to account for a weaker financial performance. Accounting for allthe above assumptions, we reach a combined valuation of $1.74B (see Exhibit 36), withsynergies representing a cost of $0.66B.IV. C4. Valuation ConclusionMicron is taking non-trivial risk with this acquisition. Though the “Most Likely Case”scenario shows sufficient synergies to overcome the disastrous cash flows of standalone 57
    • Elpida, and though the price offered is flexible based on future results, bad execution onmonetization of the synergies could ruin Micron’s income statement and future cash flows.The “Worst Case” scenario shows a $4B reduction in Micron’s valuation, in addition toacquisition costs.Micron is experienced in integrating acquisitions. Growth by acquisition has been itsstrategy for the last fourteen years. The results of a sensitivity analysis for the combinedcompany (see Exhibit 37) showcase the most critical drivers of success as WACC, Revenue,Tax Rate, and CapEx. Revenue and CAPEX synergies are the most obvious, but thedebt/equity structure of the firm needs to be optimized to minimize WACC in the currentultra-low interest rate environment. Taxes versus variable costs need to be optimizedjointly before deciding in which foundry to produce when capacity is not fully utilized.Full-fledged tax planning of production is beyond the scope of this paper. We are fairlyconfident in Micron’s ability to focus on these critical drivers and quickly improve the coststructure for the new foundries, as well as to liquidate aggressively if results don’t pan out.However, executive ego and emotional attachment should be monitored and avoided in thecrucial first three years post-acquisition. With good execution, the deal is decentlyprofitable, despite the high risk it poses.IV. D. Other Critical IssuesMicron will need to bridge both cultural and geographic distances between Elpida’s team,in Japan, and Micron’s, in the U.S. In the past, Micron developed videos and wrote materialto train its workforce overseas. However, in order to effectively absorb Elpida’s technicalknow-how, Micron’s engineering team must be willing to listen and learn from a foreignteam.Elpida’s office will also be in a strong position to support Micron’s supply-chain in Asia.This includes product packaging and testing in Singapore, and Micron’s DRAM venture(Nanya) in Taiwan. Introducing a local and talented DRAM team in this region mayincrease overall productivity in Asia, but may only be accomplished with strongmanagement support and thoughtful integration efforts both at the group and corporatemanagement levels. 58
    • Micron should also explore how to structure its ownership of Elpida with respect to Japan’sunfavorable currency exchange policy. This includes minimizing investments into Japanand potentially structuring its supply chain to finish manufacturing (i.e. back-end test,packaging) of DRAM products originating from Japan in a country with more favorablecurrency. Micron may also consider financial instruments that periodically attain a fixedexchange rate to minimize any changes to profitability.V. RECOMMENDATIONSV. A. Short-Term and Long-Term RecommendationsV. A1. Short-Term RecommendationsStart Integration As Soon As PossibleOur valuation of the combined company assumes that synergies from the acquisition areapparent as soon as 2013; otherwise, it will be difficult to justify the move. As such, werecommend Micron to start integrating with Elpida as soon as possible. The main purposeof speeding up the process is to give Micron faster control over Elpida’s operations andallow it to realize the synergies from both value and cost sides. Following arerecommended areas of focus:Interface with Customers: Elpida’s customers, including Apple, are a strategic asset for thecombined company. Retaining those customers by streamlining sales and customer serviceis one of the most important tasks for Micron.Production: Micron should take control over production decisions immediately. The mainpurpose is to define its future product mix, as it will be discussed in the secondrecommendation.Finance: To turn over Elpida’s performance, Micron needs immediate access to its financialdata. As a Japanese company, Elpida did not report its financials using GAAP standards, afact which makes the integration more complicated. Therefore, it is imperative thatElpida’s financial reports be aligned as soon as possible.Revise Product Mix 59
    • Mobile: Mobile DRAM is currently the highest paying DRAM product with a 2x multipleover PC/Notebook DRAM, but Micron’s share in this market is negligible. Elpida, however,had already gained a strong foothold in the mobile DRAM market and was in the process ofmigrating most of its output to the advanced 32nm and 25nm tech nodes (Elpida, 2012),which targets primarily mobile device makers. In light of that, we recommend Micron todecrease the share of PC/Notebook in its mix, and increase the share of Mobile DRAMsignificantly and quickly. Nomura analysts estimate that Samsung’s and Hynix’s mix ofDRAM products is comprised of approximately 25% Mobile, 25% Server, and 15%Specialty, with the remaining 35% as PC/Notebook DRAM (Nomura Equity Research,2012). We recommend that Micron take steps in the next two years to make its productmix similar to that of Samsung and Hynix. Realistically, in 2013, Micron can probablyachieve 18% mobile DRAM (Nomura Equity Research, 2012), which, according to ourvaluations, translates into 11% improvement in revenue, 30% improvement in grossmargin, and almost 50% increase of EBIT (see Exhibit 38).Specialty: Elpida’s second strongest segment was specialty DRAM, which is also a wellperforming segment for Micron. Micron can build on Elpida’s capabilities for this segment,and also capitalize on its own developed channels to sell a greater volume of Elpida’sproducts.Mutichip Package (MCP): In Memory MCPs, two memory types – DRAM and NAND – arepackaged into a smaller size, low profile chip. An MCP is especially attractive to the mobilemarket, where printed circuit boards get smaller and thinner with each new generation ofproducts. Micron already offers MCPs with its own DRAM and NAND. We recommend thatit develop a new offering containing Elpida’s DRAM and Micron’s NAND. Micron can alsobuild on the competencies that were accumulated in Akita –Elpida’s subsidiary thatspecializes in low profile packaging.Migrate CapabilitiesWith Elpida’s acquisition, Micron inherits a distinct set of capabilities, including highquality process design and knowledge in mobile DRAM. As Micron takes control of Elpida,we recommend that it take a leaf out of Samsung’s textbook and use learning to itsadvantage. In Micron’s case, this means not only preserving those capabilities, but also 60
    • migrating Elpida’s process design know-how into its own processes and facilities. Werecommend that Micron form teams from both companies that will spearhead the processand deal with change management aspects. A good place to start this transfer would be inTaiwan, where Elpida’s Rexchip and Micron’s Inotera are located.V. A2. Long-Term RecommendationsSamsung is expected to achieve the 15nm technology node in 2015-2016. When it doesachieve that, Samsung will again have a great cost advantage over any competitor that isnot able to get to the same point. Based on the rate of decline in DRAM ASPs, and on ourestimates for the cost in the current and next technology node, we conclude that, by 2016,Micron will not be profitable if it does not upgrade to 15nm (see Exhibit 39). The samelogic applies to Hynix as well.Samsung scares many big players in the semiconductors industry, and the strategic threatit poses might be Micron’s best asset. We here discuss three non-mutually-exclusiverecommendations that can change the current rules of the game.Merge with HynixMicron is probably looking at Hynix like a predator hungry for their next prey, i.e. it isexpecting Hynix to go bankrupt or face a dire financial situation, which will then provideMicron with their next cheap capacity/market share expansion by acquisition. Like Micron,Hynix is well diversified into all memory segments, while being a pure-play memorycompany that does not scare the competition. There are practical benefits to merge withHynix sooner than later:  Such a merger would provide the unified entity with double the market share each of them currently holds. This would provide the combined company with a much better control over future capacity expansion, pricing volatility, and negotiation power.  There are a lot of cost-cutting synergies that can be monetized from consolidating duplicate secondary activities.  Though the combined entity will still miss the more accurate forecasting abilities that Samsung enjoys, it can direct its doubled R&D budget towards differentiated 61
    • future memory technologies (e.g. Memristors). Differentiating the memory technologies away from its current commodity nature is one way to avoid the losing process-manufacturing race dominated by Samsung for the last decade.  The combined entity will now have an extra value-driver in the Mobile and Tablet markets, being the only non-Samsung. As explained in the following recommendation, Samsung competitors like Apple and HTC don’t want to have Samsung as their only DRAM supplier. Merger with Hynix would likely pass anti- trust court sniffing tests.It is important to note that, in 2002, Micron attempted to acquire Hynix’s memory business.The deal had already been announced, when Hynix’s directors backed off and finallycanceled it (Hoovers, 2012). If Micron is to go after Hynix again, it will have to take a closelook at the factors that worked against it in 2002, making sure to readily address them.Deep cultural differences, among other things, can hinder such a move.Position Itself to Be Acquired by AppleWe see this as the most logical and probable scenario once a single player is left out ofMicron and Hynix, whether through bankruptcy or merger, but it is also possible at thecurrent state of consolidation. Apple has proven product design and marketingcapabilities, but it is not a semiconductor company. Apple currently procures most of itsmemory needs from Samsung: a safe and stable relationship as long as multiple othercapable suppliers exist in the market. The situation would be much more risky if Samsungpresses its advantages until both Micron and Hynix are squeezed out. Anti-trust laws are avery risky deterrence for a monopolist, as proven repeatedly by Microsoft. The phone andtablet markets are orders of magnitude bigger, faster growing, and more profitable thanthe memory market. Samsung would not run out of barely legal (or outright illegal) movesto leverage their memory dominance into those fields. The consolidation of memorymanufacturers is becoming a true risk for the fabless Apple. Next step of consolidation willforce Apple to acquire the only remaining non-Samsung. We see a full acquisition moreprobable than equity investments or joint ventures, since Apple’s ability to forecast marketmemory demand would help Micron neutralize Samsung’s competitive advantages. Applealso has very deep pockets, which can potentially enable the development of a disruptive 62
    • memory technology (other than straight forward node reduction) that might change thecommodity nature of the market.The same acquisition logic can be applied to some extent to other customers, such as HTCor Motorola, giving Micron some options when the time comes to negotiate such anacquisition. Apple, however, has the most to lose and the most to protect given itsdominant market position.Partner with Intel for DRAM Process DevelopmentIn the past, Intel has partnered with Micron to create IMFT, a joint investment 51% ownedby Micron that brought to market 34nm flash memory in 2008 and that achieved industryleading 20nm flash memory in 2011. These partnerships benefited Micron through animproved competitive position over Samsung and Hynix, while benefiting Intel bymaintaining a lower CR4 in NAND memory.Both companies may seek a future DRAM partnership as a way to lower the threat ofSamsung achieving the next future DRAM product based off of 15nm design rules. Asmentioned in Section II E2 – Threats & Opportunities, the threat of Samsung attaining thistechnology would improve Samsung’s cost-competitive position, lowering profitability forboth Micron and Hynix.Intel is expected to reach 15nm capabilities in 2014 and holds equity investments in ASML(along with TSMC and Samsung), which is the sole provider of 15nm EUV lithographyequipment. A partnership with Intel will likely provide near-term access to critical processequipment from ASML, as well as the ability to reach low cost and low power 15-nm DRAMmobile products, potentially providing a lead ahead of Samsung’s DRAM development.V. B. Strategy ImplementationV. B1. Implementation of Short-Term Recommendation: Revise ProductMixIn implementing the change in product mix, we see the most value for Micron in the shortterm. The challenge for Micron is to be able to capitalize on the acquired resources andcapabilities soon and enjoy the higher margins that follow. 63
    • Assessment of Current State: The first step that Micron has to take when the acquisitionformalities are completed is to know the ins and outs of the facilities, resources, andcapabilities that it inherited from bankrupt Elpida. This step may sound trivial, but inacquisition situations, the acquiring company can only know so much about the acquiredcompany during the process of negotiations. Specifically in Elpida’s case, the challenge iseven greater because its last operational report was published in the beginning of 2012,and the last annual report was published around mid-2011. From a product mixperspective, the main question to ask is how much of Elpida’s capacity was actuallymigrated to the 32nm and 25 nm tech nodes, and what efforts are still needed to completethe migration.Timeline: Based on analysts estimates, we expect the combined company to have as muchas 15-18% mobile DRAM in its output in 2013 (Nomura Equity Research, 2012). During2014, Micron should strive towards 25% mobile DRAM.Finance: Analysts such as Credit Suisse and ThinkEquity estimate that an additional capitalinvestment of approximately $800M is required to complete the migration of Elpida’s fabsand bring them to full capacity (Credit Suisse, 2012; ThinkEquity, 2012). Withapproximately $2.5B in cash at the end of 2012, we do not expect Micron to add to its debtto finance this activity.Customer Retention: To be able to benefit from the change in product mix, Micron mustmake sure that it retains Elpida’s mobile customers. Micron should take steps to ensurethat supply is not affected by the bankruptcy or by the integration efforts. In addition,Micron must preserve Elpida’s sales channels, at least in the short term, and at the sametime send reassuring messages to customers from Micron’s headquarters in Boise.V. B2. Implementation of Long-Term Recommendation: Partner with Intelfor DRAM Process DevelopmentAchieving a competitive DRAM process technology is paramount for Micron to maintain itscost-competitiveness and low-power DRAM products that are in high-demand within themobile tablet and smartphone markets. Developing a leading edge process node will 64
    • require years of development and spending which Micron will need to begin in the nearfuture.Alliance Formation: Micron and Intel will need to assess their compatibility to partner in ajoint DRAM venture. While it is assumed that partner compatibilities and complementswill remain the same, as seen in the IMFT venture, both parties will need to review theircommitments in achieving a competitive process node in DRAM memory.Joint Venture Creation: Creation of the joint venture assuming similar equity andinvestment sharing arrangement (51% ownership by Micron). We assume that thepartnership design (provisions, governance) can heavily leverage the trust and relationalcapital also developed through the IMFT partnership over the past five years. We believethat Micron’s wafer facilities in Boise, Idaho will be a likely location for joint waferdevelopment. Alternatively, a wafer facility in Portland, Oregon can also be used.15-nm Process Development: We assume that a 15-nm DRAM product and processdevelopment may not begin until late 2013 with products ramping to mass productionuntil 2015.Supply Agreements and Exit: With competitive 15-nm DRAM products ramping to massproduction in 2015, we see Intel benefitting from a sole-source competitively priced mobileDRAM to use along with its mobile chip sets. With improved profitability, we see Microntaking the majority share of equity investments using positive operational cash flow. By2016 or 2017, Micron can potentially acquire Intel’s share in this venture.V. C. Recommendations for Corporate Social Responsibility & EthicsV. C1. Short-Term RecommendationThe manufacturing of semiconductor memory products requires many substances that arehazardous to humans and to the environment. RoHS (Restrictions of HazardousSubstances) is a European Union (EU) ordinance that restricts the use of six materials inthe production of electrical and electronic equipments: Lead, Mercury, Cadmium,Hexavalent Chromium, Polybrominated Biphenyls and Polybrominated Diphenyl Ethers(RoHSGuide.com, 2012). Micron provides both full RoHS-compliant products to meet EU 65
    • standards and 5/6 RoHS-compliant for other regions. The 5/6 compliant products uselead, which is one of the prohibited substances under RoHS (Micron, 2012). Micron doeshave the capability of producing lead-free products and offers these selectively tocustomers who request it. Our recommendation is for Micron to fully eliminate productswith lead and to supply RoHS-compliant products to all customers in all regions. Inaddition, other substances causing pollution have been identified by EU’s REACH(Registration, Evaluation, Authorization and Restriction of CHemical substances) andROSH 2.0 policies (European Commision, 2012). Micron should also voluntarily andproactively phase out these hazardous substances. Military and other critical organizationscould continue to be the only exceptions.V. C2. Long-Term RecommendationThe Electronics Industry Citizenship Coalition (EICC) provides guidance to companies inthe areas of environment, ethics, health and safety, labor, and management system (EICC,2012). The guidance comprises of issues such as working hours in the electronics industry,minerals extraction policies (e.g. procuring raw materials from conflict-free areas), andenvironmental sustainability. Micron joined the coalition in August 2008 (Micron, 2012).To monitor their suppliers against the EICC guidance, Micron provides a questionnaireregarding their practices and evaluates the responses, later seeking remedies if theresponses show non-compliance with the guidelines. However, Micron does not performany further audit of these firms, taking their responses in good faith. This is similar to howApple initially used to manage its relationship with Foxconn. However, later auditing ofFoxconn showed many violations, and Foxconn was forced to fix those issues (Wall StreetJournal, 2012). We believe Micron’s current audit of their supplier compliance is grosslyinadequate. As a good CSR practice, Micron should take the responsibility of ensuring thatall its suppliers meet the EICC standards by: 1. Requiring all suppliers to meet or exceed the EICC guidelines. 2. Developing an internal auditing capability and/or partnering with other EICC- certified auditing companies to audit all their suppliers. 3. Conducting a periodic audit of all their suppliers and setting up remedial policies for them to meet compliance within a timeframe. 66
    • 4. Coordinating with other companies to share these audits and benefit the industry by building a strong list of EICC-compliant suppliers.VI. CONCLUSIONSFirms within the DRAM industry have faced increasingly unfavorable conditions with risingequipment costs and a TAM that has remained stable at $25B over the past decade.Constantly rising CAPEX requirements, combined with falling ASPs have failed Elpidadespite excellent product and customer execution. Only firms with a broader mix ofmemory and other semiconductor products approaching different buying groups (e.g.Micron with NAND, NOR, and DRAM for server, PC, and specialty memory groups) haveremained solvent.Our analysis supports Micron’s acquisition of Elpida. We believe that the acquisition closesa hole in Micron’s technology and product portfolio at a much lower cost than Micronwould pay to develop both internally. However, in the long-term, we believe that Micron isat risk of succumbing to Samsung’s sustainable competitive advantages, where it continuesto increase its cost-competitive position through a growing market share and technologyinvestments driven by a strong cash flow. Micron will remain competitive only if it finds away to match Samsung in both cost leadership and increased scope. For this reason, werecommend Micron to broaden its partnerships with Intel beyond NAND, to include DRAMin order to reach the next 15nm technology node ahead of Samsung. We also suggest thatMicron continue investing into disruptive memory products (i.e. Memristors) and sharedevelopment costs through a partnership with its rivals (i.e. Hynix), in order to introduceother growing memory products into its semiconductor businesses.We see Micron’s stock as speculative and recommend buying as a small percentage of adiversified portfolio. In the short term, Micron’s stock faces risks due to uncertainties inthe market driven by volatile ASPs. However, we see a potential gain in market value ifMicron can aptly adopt Elpida’s product line and rebalance the combined product mix infavor of a more profitable mobile and server DRAM. Shareholders holding a long positionwill need to watch Micron’s technology moves relative to its competitors. Information 67
    • typically shared through Micron’s investor relations will indicate the risk of laggingtechnologies (relative to Samsung) to the stock’s market value at least one yearbeforehand. 68
    • VII. BIBLIOGRAPHYAcrossemi. (2011, August 03). Acrossemi Industry. Retrieved October 12, 2012, from Acrossemi.com: http://www.acrossemi.com/news/industry/3358-cuts-in-dram- output-to-not-hinge-on-variable-costs-say-some-dram-makers.htmlAlexander, R. (2012, February 16). Apple’s Toughest Competition in the Fourth-Quarter Tablet Market Was…Apple . Retrieved November 24, 2012, from iSuppli: http://www.isuppli.com/Display-Materials-and-Systems/News/Pages/Apples- Toughest-Competition-in-the-Fourth-Quarter-Tablet-Market-Was-Apple.aspxAngela Yu-Chen Lin, S. C.-C. (2009, April). The impact of semiconductor, electronics and optoelectronic industries on downstream perfluorinated chemical contamination in Taiwanese rivers. Environmental Pollution, pp. 1365-1372.Bonds Online. (2012, March 12). FT Interactive Data. Retrieved October 2012, from http://www.bondsonline.comBusinessWeek. (2009, May 19). Micron Enters Market for Tiny Display Screens. Retrieved October 2012, from businessweek.com: http://www.businessweek.com/technology/content/may2009/tc20090519_17391 5.htmCheng, C. (2012, July 3). Elpida, the mega-merger, and what comes next. EE Times.Chung, C., Yamasaki, M., Ho, S., Marcello, A., & Hiraga, Y. (2012). Global Memory Report. Nomura.CISCO. (2012, May 30). Cisco Visual Networking Index: Forecast and Methodology, 2011- 2016. Retrieved from CISCO: http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns 827/white_paper_c11-481360_ns827_Networking_Solutions_White_Paper.htmlCitizen Finetech Miyota Co., Ltd. (2012, August 10). Acquisition of Micron Technologys Display Business. Retrieved October 2012, from http://cfm.citizen.co.jp: http://cfm.citizen.co.jp/english/news/pdf/120810.pdfCredit Agricole Securities. (2012). Processor Wars. Credit Agricole Securities, 84. 69
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    • http://www.isuppli.com/Memory-and-Storage/MarketWatch/Pages/Spansion- Overtakes-Micron-in-NOR-Revenue-for-First-Time-Since-2009.aspxKerr, D. (2011, June 13). IDA approves more tax breaks for GlobalFoundries. Retrieved November 18, 2012, from Post Star: http://poststar.com/news/local/article_ab24a23c-95de-11e0-a1ee- 001cc4c002e0.htmlLapedus, M. (2012, September 17). Will EUV miss another node? Semiconductor Manufacturing and Design Community. Retrieved from http://semimd.com/blog/2012/09/17/will-euv-miss-another-node/LaPedus, M. (n.d.). Why Did Micron Buy Numonyx.Lorraine, L. (2012, October 6). Foxconn Confirms 2 Disputes Between Employees at China Plant This Month . Retrieved from WSJ: http://online.wsj.com/article/BT-CO- 20121006-700079.htmlMallard, W. (2012, August 27). Chipping Away at Japans Bailout Culture. The Wall Street Journal. Retrieved from http://online.wsj.com/article/SB100008723963904442305045776154427660187 20.htmlManners, D. (2012, August 10). Mannerisms. Retrieved from Electronics Weekly: http://www.electronicsweekly.com/blogs/david-manners-semiconductor- blog/2012/08/cheer-up.htmlMark, J., & Ma, D. (2002). Manufacturing Strategies in the Semiconductor Industry: the Case of the Dram Market. The Management Centre: Kings College London.Market Line . (2012). Company Profile: Micron Technology, Inc. Market Line Report.MarketLine. (2012). Company Profile: Micron Technology, Inc. Market Line Report.Micron. (2010, May 7). Micron Announces Closing of Numonyx Acquisition. Retrieved October 2012, from Micron.com: http://news.micron.com/releasedetail.cfm?ReleaseID=467632Micron. (2011, March 23). Micron Technology - Financial Conference Call - Q2-2011. Retrieved October 2012, from Micron.com: http://files.shareholder.com/downloads/ABEA- 72
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    • VIII. MAIN APPENDIXExhibit 1: DRAM Industry DiagramExhibit 2: Six Forces Analysis – Level OneBarriers to Entry [Score 1 – Favorable]Factors Affecting Effect Strength Rank ReasoningBarriers to EntryEconomies of scale Favorable 1 2 DRAM firms face extremely high economies of scale with(supply side) new fabrication plants costing $4.5B to $6.0B. The top four leading DRAM firms have maintained the majority of market share with each owning two or three DRAM plants, indicating high Minimun Efficiency Scale (MES) despite being able to achieve cost economies within a single plant. Extremely high volumes are required to re-coup fixed costs forming a high barrier to entrants.Network effects Favorable 1 3 Customer willingness to purchase from firms is jointly(demand side benefits dependent on product competitiveness and low-cost high-of scale) performing technology along with ample DRAM capacity. Samsung is a strong example with spending of over $10B per year in purchasing of new equipment and supplying 37% of DRAM capacity in 2012. The CR4 of DRAM is 91% 76
    • allocating the majority of revenue largely into the top four DRAM suppliers.Customer switching Moderately 2 1 Memory suppliers adhere to using JEDEC standards (seecosts Favorable www.jedec.org), accommodating standardized package sizes and chip interfaces. Major customers typically require DRAM vendors to cross-license differentiating features as a means to enable dual or multi-sourcing as a means to minimize costs. However, buyers may create supply-agreements and/or choose to work mainly with companies using the best technologies raising switching costs in some cases.Capital requirements Favorable 1 1 New entrants face a capital expense of $6B to develop a 22nm fabrication facility along with $750M in development costs. These costs are significant given the $25B forecasted market TAM for 2012. DRAM facilities typically require 2 years to build and another 1-2 years to ramp their DRAM production. The high cost and long period is coupled with the risk of significant market changes over the long-term.Incumbent advantages Moderately 2 1 Patents and cross-patents are a major advantage toindependent of scale Favorable current players (Elpida’s 6000 patent portfolio is a big part of its assets acquired by Micron). But fast technological progress might render most of these patents obsolete if a new player emerges using a different manufacturing process. Tacit knowledge, sourcing experience, and organizational prowess are barriers to entry that can be acquired at a very high cost.Unequal access to Moderately 4 4 No distribution channel is needed for this commodity.distribution channels Unfavorable Major device manufacturers who buy in bulk do not prefer to count on unproven producers. As long as the pricing is not different for the same modular product, incumbents have a small advantage accessing big customers.Restrictive Unfavorable 5 4 Semiconductor and memory manufacturing is a globalgovernment policy industry that is subject to the “Information Technology Agreement” (ITA) enforced by the World Trade Organization. In this highly visible, no-substitute industry, any tariffs, subsidies, or restrictions will be retaliated against on an international scale. Limitations to trade freedom need international consensus that is hard to happen, even against countries like Iran or North Korea.Expected retaliation Favorable 1 1 The top four DRAM firms are incentivized to oversupply the market in order to form a barrier to entry for other entrants. Incumbents also compete with each other to achieve higher die-per-wafer lower-cost technology nodes before the other as a means to increase supply become more cost competitive. This over-supply combined with downwards cost pressure and falling revenues in the DRAM TAM $25B (-15% compared to 2011) effectively deter entrants into the DRAM market. These ultra- competitive forces in a stagnant market form a strong retaliation facing new entrants.Threat of Rivalry [Score 4.5 – Moderately Unfavorable]Factors Affecting Rivalry Effect Strength Rank Reasoning 77
    • Industry concentration Moderately 4 2 CR4 = 91% (Samsung, Hynix, Elpida, Micron) UnfavorableIs the industry growing at a Unfavorable 4.5 2 The industry TAM has decreased over the past two yearsdecreasing rate or increasing from $39B to $25B. While the amount of memoryrate? shipped has doubled to 30 billion gigabits, the DRAM ASP has further dropped due to oversupply and lower- cost technology nodes, further increasing competition among firms.Are exit barriers high? Neutral 3 3 DRAM firms require specialized high-cost equipment and know-how. Firms within this industry may choose to operate despite earning negative margins. However, firms with negative margins will also face pressure to exit from lower revenues given that high-volume buyers tend to avoid buying from firms with older technologies.High commitment by rivals Unfavorable 5 1 The DRAM industry has reached a high maturity stage having shrunk from 20 firms in 2000 to less than 10 with a CR4 of 91%. With a shrinking TAM, these firms are highly committed to retaining or increasing capacity to fuel R&D investments.Competition along the same or Unfavorable 5 1 The high concentration within equipment suppliers hasdiffering dimensions led DRAM firms to adopt the same type of technology processes that require high R&D and capital expenses to achieve these newer technology firms. The first firms to adopt these nodes are rewarded with competitive product costs and higher customer value. This need to continuously invest in order to remain competitive must be met with selling memory in high volumes at increasingly low ASPs.Do firms have diverse Moderately 4 2 DRAM firms have all adopted the same strategy togoals/ideas about how to Unfavorable achieve high market share with a low-cost diversifiedcompete? portfolio. The four major firms are attempting to or have also succeeded in expanding into non-volatile NAND memory since 2004, NAND memory has grown to a $22B industry in 2012, allowing these firms to effectively bundle DRAM and NAND in customer sales.Degree of product Neutral 3 1 Despite the strong requirement to commoditize in the PCdifferentiation space, DRAM firms are finding ways to specialize in specific customer segments. This includes power and size (mobile), and reliability (specialty, server). Differentiation also occurs by not forward integrating, i.e. by not playing a dual-role as supplier and rival The effects are evident for example in mobile buyers accepting an ASP premium greater than 100% over that of PCs.Fixed costs/variable costs ratio Moderately 4 1 Memory manufacturing is a capital-intensive industry Unfavorable with high fixed costs including equipment depreciation and R&D. Variable costs is negligible compared to fixed costs (Acrossemi, 2011).Is capacity added in large Moderately 4 4 The plants have high capital investments in the billionsincrements? Unfavorable of dollars and companies will have to add large capacity for a single plant in order for the operations to be economical. Increased capacity due to new plants increase rivalry in the industry.Buyer Power [Score 2.5 – Neutral] 78
    • Factors Affecting Buyer’s Effect Strength Rank ReasoningBargaining PowerAre buyers concentrated?For Tablets & Smartphones Moderately 4 CR4 = 58% (Nokia, Samsung, Apple, LG)(Mobile) UnfavorableFor Servers Unfavorable 4 CR4 = 78% (HP, Dell, IBM, Fujitsu)For PCs & Notebooks Moderately 4 CR4 = 52% (HP, Lenovo, Dell, Acer) UnfavorableFor Specialty Applications Moderately 2 We believe that the CR4 is low given the broad usage of Favorable specialty memory into a wider range of industries including automotive and medical devices.Net Effect: Moderately 3.5 3 To a large extent, buyers are concentrated, with over Unfavorable 50% concentration in each category.Are the productsdifferentiated?For Tablets & Smartphones Moderately 2 Mobile firms expect low power consumption, high Favorable reliability, and ample capacity before using a mobile DRAM product. The preference for features will lead buyers to choosing the highest performing parts. However, mobile DRAM firms will expect a DRAM firm to license differentiators to other vendors in order to enable dual or multi-source DRAM supplies.For Servers Moderately 2 Buyers will select DRAM products based on the overall Favorable speed, latency, and reliability.For PCs & Notebooks Unfavorable 4 PC buyers value purchasing DRAM at the lowest cost possible, therefore they expect the lowest differentiated DRAM products.For Specialty Applications Moderately 2 Specialty DRAM buyers differentiate products based on Favorable the range of temperatures they can be used in and on the number of years the firm will commit to manufacturing the DRAM.Net Effect: Moderately 2.5 2 Each buyer group has varying requirements specific to Favorable their segment. The requirement for low cost and multi sourcing lowers the overall value of these differentiators.Does the buyer face low orhigh switching costs?For Tablets & Smartphones Moderately 2 Mobile DRAM products have standardized interfaces, Favorable leading to lower hardware switching costs. Mobile DRAM capacity has been limited, leading to the existence of volume agreements between firms.For Servers Moderately 2 Server firms will spend more effort qualifying DRAM Favorable products for reliability at the maximum and minimum of their product specifications. Due to the effort required to select DRAM, server firms are less likely to switch DRAM products despite similar hardware interfaces between products.For PCs & Notebooks Unfavorable 5 PC firms demand PC/Notebook DRAM products to be interchangeable achieving the lowest cost possible in products.For Specialty Applications Favorable 1 Specialty product vendors will select a product that is guaranteed to be in production for long periods of time (~10 years). Not all DRAM firms provide that capability, so switching costs for this buyer group is slightly higherNet Effect: Moderately 2.65 1 Specified DRAM products have lower switching costs due sFavorable to the effort they place in selecting products or requiring guaranteed supply agreements. PC vendors however expect very low switching costs. Based on their higher 79
    • revenue volume within the DRAM industry, they increase the weighting to moderately favorable.Do the buyers pose a The high cost of memory plants (~$3.5B / plant) meansbackward integration threat? backwards integration is unlikely.For Tablets & Smart Phones Favorable 1 Low threat although the vendor (Samsung) is alreadyFor Servers backward integrated. None of the buyers demandFor PCs & Notebooks sufficient volume to warrant the high fixed cost requiredFor Specialty Applications to produce DRAM.Net Effect: Favorable 1 1 Low threat of backwards integration.Factors Affecting Buyer’sPrice SensitivityIs the product a significantfraction of the Buyer’s costs?For Tablets & Smartphones Moderately 4 4% total COGS based on survey of numerous brands. UnfavorableFor Servers Moderately 4 12% average COGS derived from memory & server costs. UnfavorableFor PCs & Notebooks Moderately 4 4% total COGS based on PC, Notebook, and Ultra-Books. UnfavorableFor Specialty Applications Moderately Assume that the DRAM is not a significant percentage of Unfavorable the product COGS.Net Effect: Moderately 4 2 Despite DRAM’s importance, the product does not Unfavorable command a large enough percentage of the product’s bill of materials.Does the buyer earn lowprofits?For Tablets & Smartphones Moderately 3.5 High end smart phone and tablet vendors are known to Unfavorable earn above 30% margins. Low end vendors earn much lower margins (~5% margin).For Servers Moderately 2 Servers are assumed to earn above 30% gross margins Favorable estimated from HP’s 2011 10K report.For PCs & Notebooks Unfavorable 4 Most buyers earn low margins (~5%) in PC and notebooks. Data also based off of HP’s 2011 10K report.For Specialty Applications Favorable 2 Assume that specialty products in the medical and automotive field earn high gross margins.Net Effect: Neutral 2.875 1 Overall the buyer does not make high margins in the PC and some of the mobile devices yet there are higher gross margins in server and specialty products.Is the quality of the buyer’sproduct affected by theindustry’s product?For Tablets & Smartphones Moderately 2 Yes. Mobile phone and tablet vendors are sensitive to Favorable the battery life and computing performance of their products. This is improved by higher performing lower power DRAM.For Servers Moderately 2 Yes. Servers are required to speedily work with large Favorable amounts of data and low instances of failure. DRAM memory with low-latency and reliability (quality) are important for servers.For PCs & Notebooks Unfavorable 5 PC vendors have adopted increasingly higher-bandwidth DRAM memory products (DDR3) in windows 7 and windows 8 operating systems.For Specialty Applications Favorable 1 Similar to servers, the specialty applications require DRAM that operates at wider temperature ranges enabling their products to be also supported in these ranges as well.Net Effect: Moderately 2.65 1 Overall, the DRAM product improves the industry 80
    • Favorable product in most applications except for mainstream PC and notebooks.Does the industry’s productaffect the buyer’s other costs?For Tablets & Smartphones Moderately 2 Lower DRAM power consumption can enable tablet and Favorable smart phone vendors to purchase cheaper batteries.For Servers Moderately 2 More reliable DRAM will lower the costs of product Favorable down-time to replace failed DRAM. Lower power consumption will lower the overall utility bill for server farms.For PCs & Notebooks Unfavorable 5 No significant cost improvement.For Specialty Applications Moderately 2 Support of specialty DRAM over long periods reduces the Favorable vendor cost to stock high volumes of DRAM.Net Effect: Moderately 2.8 3 DRAM slightly affects buyers other costs except for Favorable mainstream PC and notebooks.Supplier Power [Score 5.0 – Unfavorable]Factors Affecting Suppliers’ Effect Strength Rank ReasoningBargaining PowerConcentration Ratio for each Unfavorable 5 1 The three major semiconductor equipment categories areSupplier Group all high concentrated – Lithography (24%), Deposition (22%), Dry Etch (12%). The DRAM industry accounts for 11.6% of total semiconductor equipment purchases.Strategic Importance of the Moderately 2 2 In 2012, DRAM CAPEX spending was $7B of the total $60Bindustry to the supplier Favorable spent across all semiconductor buyers. With 11.6%group share, the DRAM industry is not prioritized over others.Switching Costs Unfavorable 4.5 1 Switching costs are high because machines and tools are highly specialized. ASML is the only provider of 32nm and smaller photo lithography equipment enabling this technology node. They are the only vendor capable of providing EUV (extreme ultraviolet) equipment enabling the future 15nm node. (Lapedus, 2012).Are the Supplier Group’s Unfavorable 5 2 Due to the high fixed (R&D) costs of creating cutting-edgeproducts/services technology, most equipment vendors can only afford 1-2xdifferentiated? types of equipment that must capture large market share within its category.Are there substitutes for the Unfavorable 5 1 The high cost of developing new DRAM processes andSupplier Group’s high concentration within the DRAM industry has led theproducts/services? industry to focus on a single type of wafer production.Do the Suppliers pose a Moderately 2 3 The technology and IP barriers for equipment suppliers tocredible forward integration Favorable enter the manufacturing and marketing ofthreat? semiconductors are too high, as mentioned above in BTE.Threat of Substitutes [Score 2 – Moderately Unfavorable]Factors Affecting Threat of Effects Strength Rank ReasoningSubstitutesDo buyers have high propensity Moderately 4 2 DRAM faces a long-term substitute in new types of high-to substitute? Favorable speed non-volatile memory. Unlike DRAM, these devices type will retain their data when turned off. Resistive RAM (RRAM) is the most promising of these 81
    • technologies. Memory firms have begun to bring early versions of RRAM products to market in low volumes.Is the price/performance of Moderately 4 1 DRAM still outperforms RRAM memory insubstitutes high? Favorable features/specs required by customers (low power, size/density, speed, and cost). For example, Micron’s version of RRAM (phase-change memory) provides non- volatile performance, but operates at slower speed and higher power at a more expensive (45 nm) technology node.Complementors’ Power [Score 4 – Moderately Unfavorable]Factors Affecting Effects on Strength Rank ReasoningComplementors’ Power IndustryRelative ConcentrationNAND Flash Moderately 2.5 CR4=79% (Samsung, Toshiba, Sandisk, Hynix) FavorableComputer CPUs Moderately 2.5 CR4=67% (Intel, Qualcomm, Apple, Samsung) FavorableNet Effect: Moderately 2.5 1 Relative of concentration of buyer side complements Favorable is less than CR4 of DRAM (91%)Relative Buyer/Supplier SwitchingCostsNAND Flash Moderately 1 NAND and DRAM use standardized interfaces, Favorable enabling low switching costs for both types of memory.Computer CPUs Unfavorable 5 CPUs are highly differentiated, requiring complete product redesigns to switch.Net Effect: Moderately 4 2 Bundles of CPUs pose high switching costs for buyers Unfavorable while NAND and DRAM comply with the same interface standards.Ease of bundlingNAND Flash Favorable 2 Multi-chip packaging (MCP) solutions are used to sell low-profile high performance memory modules using both NAND and DRAM in the mobile and server markets. All PCs and computers require NAND or equivalent SSD/Hard-drives in their computers.Computer CPUs Favorable 2 Electronic devices with a CPU are in general required to be used with DRAM products.Net Effect: Favorable 2 1 High. NAND and CPUs are typically required to be bundled with DRAM.Differences in pull throughNAND Flash Moderately 4 NAND memory in general determines the amount of Unfavorable DRAM required to interface with it.Computer CPUs Unfavorable 5 CPU power and capabilities generally determine the type and amount of DRAM that must be used with it.Net Effect: Moderately 4.5 1 Both CPU’s and NAND determine the amount and Unfavorable type of DRAM required to be bundled with an electronic device.Threat of vertical integrationNAND Flash Moderately 4.5 NAND firms in general possess the semiconductor Unfavorable equipment and know-how to build DRAM devices.Computer CPUs Moderately 4.5 CPU firms also possess the equipment and know- Unfavorable how to design DRAM devices. 82
    • Net Effect: Moderately 4.5 1 Unfavorable for DRAM suppliers given that NAND Unfavorable and CPU firms have low barriers to entry into the DRAM market.Rate of growth of the value pieNAND Flash Favorable 5 Demand for NAND and DRAM memory is steadily increasing both with demand for consumer electronics and the data storage and bandwidth.Computer CPUs Favorable 5 Purchases of consumer electronics (servers, PCs, mobile devices) has gradually increased, greatly raising the demand for computing devices and their performance.Net Effect: Favorable 5 2 Favorable growth in the value pie as a result of increasing demand in servers and mobile devices as a result of the “Great IT Shift”. 83
    • Exhibit 3: DRAM Capacity as a Key Revenue Driver Nanya Micron Elpida % Revenues % Cap Hynix Samsung 0% 10% 20% 30% 40% 50%Source: (Nomura Equity Research, 2011; Nomura Equity Research, 2012)Exhibit 4: Cost Leadership – Samsung Leading the Pack ASP Micron Samsung Hynix Elpida Expon. (ASP) Optimum standard margin based on 65nm Process @ $2.41 ASP and process capabilities $1.80 /GB $1.80 $1.60 $1.71 58nm Process @ $1.50 /GB $1.50 $1.21 $1.17 $1.05 $1.00 $1.00 45-48nm Process $0.86 $0.80 @ $1 - $1.17 /GB Samsung achieves $0.70 lowest cost process $0.60 DRAM ASP 1-1.5 years ahead of 32-38nm Process $0.50 Curve competition @ $0.5 - $0.7 /GB $0.40 $0.40 25-29nm Process Elpida closes cost $0.30 @ $0.3 - $0.5 /GB leadership by ~6months. $0.20 $0.10 2008 2009 2010 2011 2012 2013Source: (Nomura Equity Research, 2011; Nomura Equity Research, 2012; Pajjuri, Heller, & Goodman, 2012) 84
    • Exhibit 5: “The Great IT Shift” – Smartphones and Tablets Overtake Desktops andNotebooks 900,000 800,000 700,000 600,000 Desktops 500,000 Notebooks 400,000 Smart Phone 300,000 Tablets 200,000 100,000 - 2010 2011 2012 2013Source: (Nomura Equity Research, 2012)Exhibit 6: Growth and Drivers for Global Data Traffic Measured in Exabytes Mobile Devices Streaming Video 120k 100k Social Networking 80k 60k 40k 20k k 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (F) (F) (F) (F) (F)Source: (CISCO, 2012) 85
    • Exhibit 7: VRIO AnalysisSamsungResource or capability Elaboration Valuable Scarce/ Difficult to imitate? Exploited by Competitive Rare? the firm? ImplicationsEquity in Equipment Samsung owns equity shares in key Yes Yes Yes Yes SustainableSuppliers semiconductor equipment suppliers, Unique historical conditions - path competitive enabling accelerated equipment dependence. None of the other DRAM advantage development and manufacturing needed suppliers possess large cash reserves for the next technology nodes. sufficient to support equity investment in suppliers.Vertical Integration 1. Guaranteed demand Yes Yes Yes Yes Sustainable 2. More accurate market forecast info Unique historical conditions - path competitive 3. Design feedback from consumer dependence. Significant investment and advantage electronics designers engineering know-how needed. 4. First entrant (see Exhibit 40 for a discussion of the Stackelberg model)Ability to take Cash put into leading technology => Yes Yes Yes Yes Sustainableadvantage of a positive rapid learning process => cost Causal Ambiguity. Samsungs investment competitivefeedback loop advantage, first to get to market => system to continuously re-invest advantage capture higher margins => higher operational cash-flow maintains leading- profitability => more cash edge technology processes.HynixResource or capability Elaboration Valuable Scarce/ Difficult to imitate? Exploited by Competitive Rare? the firm? ImplicationsPresence in China Hynix directed sales and marketing Yes Yes No Yes Temporary efforts to smartphone manufacturers in competitive China and currently has strong advantage relationships thereElpidaResource or capability Elaboration Valuable Scarce/ Difficult to imitate? Exploited by Competitive Rare? the firm? ImplicationsProcess Design Ability to design and ramp new Yes Yes Yes Yes SustainableCapabilities technology nodes quickly, a strong Causal ambiguity. Elpida consistently competitive engineering team demonstrates having higher quality & advantage faster time-to-market DRAM products. 86
    • Product Design Ability to design cutting-edge DRAM Yes No Yes ParityCapabilities product portfolioCustomer 1, Apple supplier for iPad and iPhone Yes No Yes TemporaryRelationship 2, Customized testing facilities Competitive AdvantageMost of fabs and R&D High employee retention Yes No Yes Paritycenters located inJapanMicronResource or capability Elaboration Valuable Scarce/ Difficult to imitate? Exploited by Competitive Rare? the firm? ImplicationsOwnership of HQ and Retaining valuable employees over long- Yes Yes No Yes Temporaryfacilities in Boise, periods of time due to lack of CompetitiveIdaho employment alternatives in Advantage semiconductors in BoiseExperience in M&A Ability to merge acquired companies Yes No Yes Parity efficiently into Microns corp.Know how for older Ability to support older memory Yes Yes Yes Yes Sustainableproducts products over long periods of time. - Unique historical conditions. Competitive Employees expertise in legacy products Advantage will be rare. - Social complexity. Difficult to maintain except if company & location fosters a culture where employees stay in the company for long periods of time.Older fabs in good To serve the longevity program Yes Yes Yes Yes Sustainableoperating conditions, Path dependence. Choice to maintain an Competitivenot converted to out-of-date facility. Advantagenewer technologiesResell channel of other Micron can take advantage of temporary Yes No Yes Paritymanufacturers DRAM low DRAM prices to profit from DRAM ASP volatility. 87
    • Exhibit 8: Value Drivers and Value EstimationsThis exhibit lists the value drivers in the DRAM industry based on analysts’ reports and interviews conductedwith Micron employees. For each DRAM segment, we gave a different weight to each driver, with 5representing the most important driver and 1 representing the least important one. We then gave a score toeach competitor on its performance in a specific driver for a specific segment. A performance score of 3represents no advantage or disadvantage compared to other competitors. A score of 5 represents excellentperformance.PC & Notebook Weight Performance (1 lowest to 5 highest) (1-5) Micron Elpida Hynix SamsungQuality (% defects, MTTF) 3 3 3 3 3Power (mW) 3 3 3 3 3Size (mm^2) - Smaller is better 2 3 3 3 3Speed (MHz) 5 3 3 3 3Time Delay (Latency) 3 3 3 3 3Operating Temperature Range 3 3 3 3 3Guaranteed Capacity 1 3 3 4 2Longevity (Long product life cycle) 1 3 3 3 3Bundling Capability 1 3 3 3 3Brand Recognition 2 3 3 3 3Depth of Line (Types of memory) 2 3 3 3 3Total N/A 3.00 3.00 3.04 2.96% Value change relative to Micron N/A N/A 100% 101% 99%Mobile Weight Performance (1 lowest to 5 highest) (1-5) Micron Elpida Hynix SamsungQuality (% defects, MTTF) 3.5 3 5 3 3Power (mW) 5 2 4 4 4Size (mm^2) - Smaller is better 4.5 2 4 4 4Speed (MHz) 5 2 5 4 4Time Delay (Latency) 3 3 3 3 3Operating Temperature Range 3 3 3 3 3Guaranteed Capacity 5 2 4 4 2.5Longevity - long product life cycle 1 3 3 3 3Bundling Capability 4 2 4 5 5Brand Recognition 4.5 2 5 4 4Depth of Line (types of memory) 1 2 3 3 3Total N/A 2.27 4.13 3.81 3.62% Value change relative to Micron N/A N/A 182% 168% 160%Server Weight Performance (1 lowest to 5 highest) 88
    • (1-5) Micron Elpida Hynix SamsungQuality (% defects, MTTF) 5 4 0 3 3Power (mW) 3 4 0 4 4Size (mm^2) - Smaller is better 3 3 0 3 3Speed (MHz) 5 3 0 3 3Time Delay (Latency) 5 5 0 3 3Operating Temperature Range 4 3 0 3 3Guaranteed Capacity 3 4 0 3 2Longevity (Long product life cycle) 2 3 0 3 3Bundling Capability 1 4 0 3 3Brand Recognition 4 5 0 3 4Depth of Line (Types of memory) 3 5 0 3 3Total N/A 3.95 0.00 3.08 3.11% Value change relative to Micron N/A N/A 0% 78% 79%Specialty Weight Performance (1 lowest to 5 highest) (1-5) Micron Elpida Hynix SamsungQuality (% defects, MTTF) 3 5 4 3 3Power (mW) 1 3 3 3 3Size (mm^2) - Smaller is better 1 3 3 3 3Speed (MHz) 2 3 3 3 3Time Delay (Latency) 1 3 3 3 3Operating Temperature Range 5 5 3 3 3Guaranteed Capacity 5 5 1 1 1Longevity (Long product life cycle) 5 5 1 1 1Bundling Capability 1 3 3 3 3Brand recognition 1 5 3 3 3Depth of Line (Types of memory) 1 3 3 3 3Total N/A 4.46 2.35 2.23 2.23% Value change relative to Micron N/A N/A 53% 50% 50%Exhibit 9: Values, Costs and PricesThe table below was used to determine the cost for each competitor (Nomura Equity Research, 2011; NomuraEquity Research, 2012): Micron Elpida Hynix Samsung Tech Node Cost/GB Tech Node Cost/GB Tech Node Cost/GB Tech Node Cost/GB 34nm $0.60 32nm $0.51 39nm $0.70 29nm $0.40 34nm $0.60 45nm $1.00 48nm $1.17 35nm $0.60 48nm $1.17 45nm $1.00 48nm $1.17 35nm $0.60 89
    • 48nm $1.17 45nm $1.00 48nm $1.17 35nm $0.60The table below was used to determine prices (Nomura Equity Research, 2011):Segment ASP Multiplier PriceMobile 2.5 $2.25Server 2 $1.80Specialty 1.5 $1.35PC/Notebook 1 $0.90Value Minus Cost Analysis 90
    • Exhibit 10: Primary Competitors Financial RatiosSource: Companies’ Financial Reports Gross Margin 50.0% 40.0% 30.0% SAMSUNG 20.0% HYNIX 10.0% ELPIDA 0.0% MICRON 2007 2008 2009 2010 2011 -10.0% -20.0% -30.0% Profit Margin 40.0% 20.0% 0.0% SAMSUNG 2007 2008 2009 2010 2011 HYNIX -20.0% ELPIDA -40.0% MICRON -60.0% -80.0% Return on Assets 0.20 0.10 SAMSUNG 0.00 2007 2008 2009 2010 2011 HYNIX -0.10 ELPIDA -0.20 MICRON -0.30 -0.40 91
    • Return on Equity0.400.200.00 SAMSUNG-0.20 2007 2008 2009 2010 2011 HYNIX-0.40 ELPIDA-0.60 MICRON-0.80-1.00 Current Ratio3.002.502.00 SAMSUNG1.50 HYNIX ELPIDA1.00 MICRON0.500.00 2007 2008 2009 2010 2011 Quick Ratio2.001.801.601.401.20 SAMSUNG1.00 HYNIX0.80 ELPIDA0.60 MICRON0.400.200.00 2007 2008 2009 2010 2011 92
    • Debt-Equity Ratio3.002.502.00 SAMSUNG1.50 HYNIX ELPIDA1.00 MICRON0.500.00 2007 2008 2009 2010 2011 Inventory Turnover16.0014.0012.0010.00 SAMSUNG 8.00 HYNIX 6.00 ELPIDA MICRON 4.00 2.00 0.00 2007 2008 2009 2010 2011 Asset Turnover1.401.201.00 SAMSUNG0.80 HYNIX0.60 ELPIDA0.40 MICRON0.200.00 2007 2008 2009 2010 2011 93
    • Days Sales Outstanding120.0100.0 80.0 SAMSUNG 60.0 HYNIX ELPIDA 40.0 MICRON 20.0 0.0 2007 2008 2009 2010 2011 R&D as % of Sales0.160.140.120.10 SAMSUNG0.08 HYNIX0.06 ELPIDA0.04 MICRON0.020.00 2007 2008 2009 2010 2011 Capex Spending as % of Sales70.0%60.0%50.0% SAMSUNG40.0% HYNIX30.0% ELPIDA20.0% MICRON10.0% 0.0% 2007 2008 2009 2010 2011 94
    • Exhibit 11: Analysis of AcquisitionsDisplaytechMicron acquired Displaytech in May 2009 as part of its ongoing attempts to diversify the company’s portfoliooutside the core memory business.Dimension of Analysis Recommended strategyType of synergiesModular. Nonequity The technology and manufacturing of microdisplays are different than alliance those for memory, and are actually closer to CMOS imaging. The companies expected some synergies on R&D.Types of A combination of hard resources and soft resources. Micron acquired Acquisition orresources Displaytech mostly for the technology, for diversification purposes. equity allianceMarket The market for microdisplays and pico-projectors (the expected Nonequity orconditions direction of growth for this technology) was highly uncertain. Demand equity alliance was not picking up and industry insiders hoped the acquisition itself would increase customer’s confidence in the technology. The biggest player in this space among the large semiconductor companies was Texas Instruments.Conclusion: Combining all factors, Micron’s recommended strategy in this case would be an equity alliance.NumonyxIn February 2010, Micron acquired Numonyx B.V., a privately held flash-type memory chips maker that wasfounded in 2008 by Intel, STMicroelectronics, and Francisco Partners.Dimension of Analysis Recommended StrategyType of synergies Reciprocal. Acquisition With the Numonyx acquisition, Micron enhanced its NAND capabilities and inherited NOR capabilities. Both are core products for Micron’s memory businesses and the company expected a high level of integration.Types of resources Both hard and soft resources. At the time of the acquisition, Numonyx Acquisition had 6,400 employees and three fabs – two manufacturing fabs in Israel and Singapore and one R&D fab in Italy. Micron was expected, at the time of the acquisition, to eliminate redundant resources by reducing Numonyx’s overhead and headcount (LaPedus).Market conditions At the time of the acquisition, demand for NOR products was uncertain, Acquisition but NAND products already gained growth momentum. Rivalry in the NAND space was intense, as in the memory products in general. The main players were Samsung, Toshiba, SanDisk, and Hynix.Conclusion: As seen from the analysis, acquisition was indeed the right strategy.Exhibit 12: Analysis of Partnerships 95
    • IntelIn 2006 Intel and Micron formed a joint venture called IM Flash Technologies, LLC ("IMFT"), to manufactureNAND flash memory products for the two companies. The dimensions of analysis for this type of partnership donot fall neatly into the “Ally or Acquire” framework, but we will still use it as a basis for our analysis.Dimension of Analysis Recommended StrategyType of Synergies in this case are reciprocal – both companies contribute resources Acquisitionsynergies and share the risk in developing and manufacturing a product that is new to both of themTypes of Creating the joint venture would require a combination of hard and soft Acquisitionresources resources. Having a NAND operation in each company separately would be more costly and would create redundancy.Market The market for NAND products was already picking up at that time and the Acquisitionconditions joint venture was a way for both companies to enter into that market. Rivalry was always very high in the memory marketAlthough the recommendation of the “Acquire or Ally” framework is an acquisition, we have to takeinto account other factors: Both companies did not have a NAND operation at that time. Intel was not interested in entering the memory market, which it exited back in the 1980s. However, it had a business interest in keeping products that are complementary to logic chips (e.g. memory chips) technologically advanced and in vast supply. There was no business rationale or resources for Micron to acquire Intel. The resources needed to start a memory operation from scratch are prohibitively high. Sharing the resources between the two companies allowed both of them entry into a new territory.Conclusion: The joint venture serves the interests of both companies well. It gives Intel a foothold inthe memory business and it gives Micron the resources it needs to enter the NAND market. 96
    • NanyaIn 2011 Micron had two DRAM joint ventures with Nanya: Inotera and MeiYa. The rationale for the joint venturewas similar to the one with Intel described above.Dimension of Analysis Recommended StrategyType of Synergies in this case are reciprocal – both companies contribute resources Acquisitionsynergies and share the risk in developing and manufacturing a product that is new to both of themTypes of Creating the joint venture would require a combination of hard and soft Acquisitionresources resources. Because both companies already have a DRAM operation, there will be much redundant resources.Market The market for DRAM products was highly volatile with a high level of rivalry AcquisitionconditionsOther factors to consider: The part of the agreement with Nanya which is very valuable to Micron is the royalties that Nanya pays for intellectual property that was shared as part of the joint venture agreement. Micron gains revenue this way with no production expenses. Both companies are long timers in the DRAM business, but Nanya currently lags behind in technology and performance.Conclusion: In this case, the “Acquire or Ally” recommendation of acquisition may have worked betterfor Micron mainly because Nanya is a high risk partner. 97
    • Exhibit 13: BCG Matrix for MicronExhibit 14: Micron’s Value Chain 98
    • Exhibit 15: Elpida’s Organization Chart CEO Administration & Technology New Memory Finance & Sales & Marketing Quality Assurance DRAM Business Audit Office Management Development Development Accounting Office Office Office Unit Office Office Group Computing Planning Mobile Division Specialty Division Hiroshima Plant Division DepartmentSource: (Elpida Memory Inc., 2012)Exhibit 16: Elpida’s Corporate Governance Bodies and CommitteesBody/Committee Description and RoleBoard of Directors Seven members (including an outside director) who make decisions regarding management issues and supervise the execution of the business.Board of Corporate Four members (including two outside auditors) who audit the duties executed byAuditors directors and scrutinize the company’s overall operations, systems and assets.Officers Meeting Thirteen members (including directors involved in operations) who meet once per week to decide important business operations matters.Executive Five members selected by the Board of Directors who decide the allocation ofCompensation remuneration for directors and auditors.Advisory CommitteeRisk Management Decides and manage policies that concern risk management and compliance systemsand Compliance for the entire companyCommitteeAudit Office Six members who ensure the full implementation of internal controls as it relates to the company’s plans and financial reports.Source: (Elpida Memory Inc., 2012) 99
    • Exhibit 17: Elpida’s Value ChainExhibit 18: Ally or Acquire Framework for Elpida’s AcquisitionDimension of Analysis Recommended strategyType of synergiesReciprocal Acquisition Elpida is making products that are similar to Micron’s. The companies will benefit from combining resources and capabilities by ways of better efficiency and economies of scope.Types of Both hard and soft resources. Acquisition orresources Most of the resources are not considered redundant. Equity AllianceMarket Market uncertainty is expected to be relatively low. The industry expects Acquisitionconditions one of the players to acquire Elpida and will not resent the move. In addition, further consolidation is expected to contribute to market stabilization.Conclusion: Combining all factors, Micron’s recommended strategy in this case would be an acquisition. 100
    • Exhibit 19: Combined Company’s Value Minus Cost 101
    • Exhibit 20: Combined Company’s VRIO AnalysisResource or capability Elaboration Valuable Scarce/ Difficult to imitate? Exploited by Competitive Rare? the firm? ImplicationsDRAM R&D centers located Skilled and experienced employee base Yes No Yes Parityin Japan (Asia) located in AsiaFull or partial ownership of Through control of DRAM supply, Micron Yes No Yes ParityDRAM factories in Taiwan. has increased control on market pricing and holds greater market share.Customer relationships in Elpida has developed strong relationships Yes Yes No Yes TemporaryMobile market and brand in the mobile market place as the Competitive sole supplier to Apple’s iPad and iPhone. AdvantageBundling capabilities Subsidiary (Akita) possesses leading small Yes No Yes Parity form-factor multi-chip packaging technologyMobile DRAM product Through Elpida, Micron has designed Yes No Yes Paritydesign competitive mobile DRAM products.Leading NAND and DRAM Micron owns and operates NAND and DRAM Yes No Yes Paritymanufacturing capabilities facilities with competitive low-power small- form factor design rules.Environmentally friendly Owns environmentally friendly gas- Yes No Yes ParityDRAM manufacturing powered electrical systems and wastecapabilities recycling systems. 102
    • IX. FINANCIAL BACKGROUND APPENDIXExhibit 21: Profitability Ratios – Industry Average versus Micron 5 Year Average (2007-2011) 10.0% 5.0% Micron 0.0% Industry Operating Margin Profit Margin Return on Assets Return on Equity -5.0% -10.0% -15.0%Source: Companies’ Financial ReportsExhibit 22: CapEx and R&D Expenditures – Industry Average versus Micron CapEx as % of Sales R&D as % of Sales 80.0% 15.0% 60.0% 10.0% 40.0% 5.0% 20.0% 0.0% 0.0% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Micron Industry Micron IndustrySource: Companies’ Financial Reports 103
    • Exhibit 23: Micron’s Standalone ValuationAssumptionsRevenue 4%COGS 79%SG&A 8%R&D 11%Other Operating Income Expense, Net 0%Depreciation & Amortization 30%CapEx 28%Change in Net Working Capital -Restructure 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Terminal Base Year 4% 4% 4% 4% 4% 4% 4.05% 4.15% 4.25% 4.35% 4.45%Revenue 8,234 8,563 8,906 9,262 9,633 10,018 10,419 10,841 11,290 11,770 12,282 COGS 6,464 6,722 6,991 7,271 7,562 7,864 8,179 8,510 8,863 9,240 9,642Gross Margin 1,770 1,841 1,915 1,991 2,071 2,154 2,240 2,331 2,427 2,531 2,641 SG&A Expenses 620 685 712 741 771 801 833 867 903 942 983 R&D 918 942 980 1,019 1,060 1,102 1,146 1,192 1,242 1,295 1,351 Restructure - - - - - - - - - - - Other Operating Expenses - - - - - - - - - - -Operating Income(Loss) Before Taxes(EBIT) 232 214 223 232 241 250 260 271 282 294 307Net Income (Loss)After Taxes 193 178 185 192 200 208 216 225 234 244 255+ Depreciation &Amortization 2,222 2,569 2,672 2,779 2,890 3,005 3,126 3,252 3,387 3,531 3,685- CapEx 1,699 2,398 2,494 2,593 2,697 2,805 2,917 3,035 3,161 3,296 3,439- Change in Net WorkingCapital 92 96 100 103 108 112 116 121 126 132 137Free Cash Flow 624 253 263 274 285 296 308 321 334 348 363 8,590 WACC 8.87% Discount Factor 0.428 1.000 0.919 0.844 0.775 0.712 0.654 0.601 0.552 0.507 0.466 0.428 PV - 233 222 212 203 194 185 177 169 162 155 3,673Sum of PV 1,912PV of Terminal Value 3,673Enterprise Value 5,585 104
    • Exhibit 24: Micron’s Growth ForecastTo project Micron’s future revenue growth, we calculated a weighted average of Micron’s historicaldata (Part 1 below), growth predictions for Micron’s key markets NAND and DRAM (Part 2), andnominal GDP (Part 3).Part 1: Historical Revenue Growth Year 2012 2011 2010 2009 2008 2007 2006 2005 Average Revenue (in $M) 8,234 8,788 8,482 4,803 5,841 5,688 5,272 4,880 N/A Growth N/A -6.3% 3.6% 76.6% -17.8% 2.7% 7.9% 8.0% 3.2%Note: Due to financial crisis, revenue changes for years 2008 and 2009 were not included in the calculation.Historical Revenue Growth = 3.2%Part 2: Growth Estimate by Segment NAND DRAM Average Growth forecasts until 2016 16.6% 9.6% N/A Revenue % contribution by 60% 40% N/A segment Adjusted growth for Micron 10.0% 3.6% 4.6%Notes:  Only NAND and DRAM were considered for the growth estimate by segment as those markets are expected to be the key revenue drivers for Micron.  Growth forecasts until 2016 based on analysts’ estimations (Manners, 2012)Growth Prospects for NAND and DRAM = 4.9%Part 3: Nominal GDP GrowthNominal GDP growth was calculated by averaging the GDP growth rate forecasts for the coming 5years as published by the International Monetary Fund (International Monetary Fund, 2012).Nominal GDP Growth = 4.45%Micron’s Revenue Growth for Next 10 Years: 4.0%Growth = 0.5 * 3.2% + 0.3 * 4.9% + 0.2 * 4.45% = 4.0%The assumed weights for revenue growth calculation are as follows: 50% for historical companyrevenue growth; 30% for growth prospects of NAND and DRAM; and 20% for expected NominalGDP growth forecast. 105
    • Exhibit 25: Micron’s Growth Forecast for FCF ComponentsThe value of each FCF components is based on Micron’s historical data and represents the average of the component value as apercentage of revenue for the period from 2005 to 2012.Year 2005 2006 2007 2008 2009 2010 2011 2012 AverageRevenue 4,880 5,272 5,688 5,841 4,803 8,482 8,788 8,234 -CapEx 1,065 1,365 3,600 2,529 488 616 2,550 1,699 - 22% 26% 63% 43% 10% 7% 29% 21% 28%Depr & Amortization 1,265 1,281 1,718 2,060 2,186 2,005 2,162 2,222 - 26% 24% 30% 35% 46% 24% 25% 27% 30%Other oper, (income) 22.3 266 76 91 -107 11 359 -42 -expense, net 0.46% 5.05% 1.34% 1.56% -2.23% 0.20% 4.09% -0.51% 1.24%SG&A 348.3 460 610 455 354 528 592 620 - 7% 9% 11% 8% 7% 6% 7% 8% 8%R&D 603.7 656 805 680 647 624 791 918 - 12% 12% 12% 12% 13% 7% 9% 11% 11%COGS 3,734 4,072 4,610 5,896 5,243 5,768 7,030 7,266 - 77% 77% 81% 101% 109% 68% 80% 88% 78.51%Restructure 1 0 19 33 70 -10 -21 7 - 0.02% 0% 0.33% 0.56% 1.46% -0.12% -0.24% 0.09% 0.26%Change in Net Working CapitalYear 2005 2006 2007 2008 2009 2010 2011 2012 AverageAccounts Receivable 1,265 1,281 1,718 2,060 2,186 2,005 2,162 2,222 - N/A 161.6 38 38 -234 733 -34 -208 71Inventory 771.5 963 1,532 1,291 987 1,770 2,080 1,812 - N/A 191.5 569 -241 -304 783 310 -268 149Accounts Payable 752.5 1,319 1,385 1,111 1,037 1,509 1,830 1,641 - N/A 567 66 -274 -74 472 321 -189 127Net Working Capital 813.4 600 1,141 1,212 748 1,792 1,747 1,460 -Change in NWC N/A -213 541 71 -464 1,044 -45 -287 92 106
    • Exhibit 26: Micron’s WACC CalculationPart 1: Cost of EquityCapital Asset Pricing Model (CAPM) is used to calculate Cost of Equity for Micron: Re = Rf +*RmAssumed:  Risk Free Rate (Rf) is 10-year Treasury note as of 08/30/2102 = 1.86%. Source: (US Department of the Treasury, 2012)  Market risk premium (Rm) = 6.01% Source: (Damodaran, 2012)  Beta () = 1.77 (see calculation below)Beta () calculation:Source BetaGoogle Finance 1.3NASDAQ 2.11Macroaxis 1.75Yahoo Finance 1.78Median Beta 1.77Cost of Equity (Re ) = Rf +*Rm = 1.86% + 1.77 * 6.01%Cost of Equity (Re) = 12.5%Part 2: Cost of DebtAccording to Moody’s and Standard & Poor, Micron’s credit rating is Ba3 and BB respectively. The spreadbetween BB- rated bonds and 10-year US Treasuries is used to estimate the risk premium (the excessbeyond the risk free rate).Corporate Bonds Spreads (Bonds Online, 2012): Rating 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 30 yr Aaa/AAA 15 20 50 35 85 50 70 Aa1/AA+ 25 25 55 40 90 55 75 Aa2/AA 30 30 60 45 95 60 80 Aa3/AA- 35 35 65 50 100 65 85 A1/A+ 45 45 70 60 105 80 100 A2/A 55 60 75 70 110 90 110 A3/A- 85 90 110 80 115 100 120 Baa1/BBB+ 100 120 120 125 170 140 150 Baa2/BBB 115 130 150 145 185 160 175 Baa3/BBB- 185 140 215 225 250 210 220 Ba1/BB+ 300 350 400 350 350 300 315 Ba2/BB 400 425 450 450 400 350 365 Ba3/BB- 450 500 475 475 425 375 385 107
    • B1/B+ 500 550 550 550 475 400 415 B2/B 600 625 700 650 525 575 475 B3/B- 650 675 750 675 650 625 500 Caa/CCC+ 725 750 775 800 825 775 750 US Treasury Yield 0.28 0.52 0.77 1.51 2.19 2.84 4.16Assumed:  Risk Free Rate (Rf) is 10-year Treasury note as of 08/30/2102 = 1.86% Source: (US Department of the Treasury, 2012)  Spread (Ba3 v Rf) = 3.75 (from table above)  Effective Tax Rate = 17% Source: (Micron, 2011)Cost of Debt (Rd) Tax Adjusted = (Rf + Spread) * (1 – Tax Rate) = (1.86% + 3.75) * (1 – 17%)Cost of Debt (Rd) Tax Adjusted = 4.66%Part 3: Cost of Capital (WACC)Micron’s weighted average cost of debt is determined using equation: WACC = (E/V)*Re +(D/V)*RdDescription ValueTotal Shares Outstanding (TSO, as of 08/30/2012) 991.20Stock Price (08/30/2012) 6.18Market Value of Company Equity (E) = TSO * Stock Price 6,126Market Value of Company Debt (D) 5,281Total Capital Invested (V) = E + D 11,407WACC = (6,126/11,407)* 12.33 + (5,281/11,408)* 4.47WACC = 8.87 108
    • Exhibit 27: Profitability Ratios – Industry Average versus Elpida 5 Year Average (2007-2011) 10.0% 5.0% 0.0% Gross Margin Profit Margin Return on Assets Return on Equity -5.0% Elpida -10.0% Industry -15.0% -20.0% -25.0%Source: Companies’ Financial Reports 109
    • Exhibit 28: Elpida’s Standalone ValuationAssumptionsRevenue 3.3%COGS 83.5%SG&A 12%R&D 2%Other Operating Income Expense, Net 0%Depreciation & Amortization 11%CapEx 25%Change in Net Working Capital -Restructure 39% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Terminal Base Year 3.3% 3.3% 3.3% 3.3% 3.3% 3.5% 3.7% 3.9% 4.1% 4.3% 4.45%Revenue 3,696 3,818 3,944 4,074 4,209 4,347 4,500 4,666 4,848 5,047 5,264 COGS 3,087 3,188 3,293 3,402 3,514 3,630 3,757 3,896 4,048 4,214 4,395Gross Margin 609 630 651 672 694 717 742 770 800 833 869 SG&A Expenses 44 458 473 489 505 522 540 560 582 606 632 R&D 74 76 79 81 84 87 90 93 97 101 105Operating Income (Loss)Before Taxes (EBIT) 91 95 99 102 105 109 112 117 121 126 132Net Income (Loss)After Taxes 55 58 60 62 64 66 69 71 74 77 80+ Depreciation &Amortization 399 412 426 440 455 470 486 504 524 545 568- CapEx 924 954 986 1,019 1,052 1,087 1,125 1,167 1,212 1,262 1,316- Change in Net WorkingCapital 30 31 32 33 34 35 37 38 39 41 43Free Cash Flow -500 -515 -532 -550 -568 -586 -607 -629 -654 -681 -710 -7,811 WACC 14% Discount Factor 1 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.270 PV -452 -409 -371 -336 -305 -277 -252 -229 -209 -192 -2,107Sum of PV -3,031PV of Terminal Value -2,107Enterprise Value -5,138 110
    • Exhibit 29: Elpida’s Growth ForecastTo project Elpida’s’s future revenue growth, we calculated a weighted average of Micron’s historical data(Part 1 below), growth predictions for the DRAM memory market(Part 2), and nominal GDP (Part 3).Part 1: Historical Revenue Growth 2012 2011 2010 2009 2008 2007 2006 N/A 2,648 5,631 4,796 3,077 3,309 3,999 N/A -53% 17% 56% -7% -17% -Note: Because the 2008 financial crisiss impact was not significant for Elpida, we accounted 2009 and 2008 in thehistorical average revenue growthHistorical Revenue Growth = -1%Part 2: Growth Estimate for DRAMGrowth Estimate for DRAM = 9.6% Source: (Manners, 2012)Part 3: Nominal GDP GrowthNominal GDP growth was calculated by averaging the GDP growth rate forecasts for the coming 5 years aspublished by the International Monetary Fund (International Monetary Fund, 2012).Nominal GDP Growth = 4.45%Elpida’s Revenue Growth for Next 10 Years: 3.37%Growth = 0.5 * (-1.0%) + 0.3 * 9.6% + 0.2 * 4.45% = 3.37%The assumed weights for revenue growth calculation are as follows: 50% for historical company revenuegrowth; 30% for growth prospects of DRAM; and 20% for expected Nominal GDP growth forecast. 111
    • Exhibit 30: Elpida’s Growth Forecast for FCF ComponentsThe value of each FCF components is based on Micron’s historical data and represents the averageof the component value as a percentage of revenue for the period from 2007 to 2011.Year 2007 2008 2009 2010 2011 AverageRevenue 3,309 3,077 4,796 5,631 2,648 -CapEx 873 1,487 1,183 998 503 - 26% 48% 25% 18% 19% 27%Depr & Amortization 790 899 994 1,089 1,167 - 24% 29% 21% 19% 44% 27%SG&A 401 457 505 538 593 - 12% 15% 11% 10% 22% 12%R&D 58 68 137 105 41 - 2% 2% 3% 2% 2% 2%COGS 3,037 3,877 3,882 4,520 3,169 - 92% 126% 81% 80% 120% 99.73%Change in Net Working CapitalYear 2007 2008 2009 2010 2011 AverageAccounts Receivable 566.7 501 1259.4 827 413 - -389 -66 759 -433 -414 -109Inventory 607 614 747.9 793 935 - -356 7 134 46 142 -6Accounts Payable 459 449 550 593 598 - -860 -10 101 43 5 -144Net Working Capital 714 666 1,457 1,027 750 -Change in Net Working 114 -49 792 -430 -277 30CapitalExhibit 31: Sensitivity / Regression Analysis for Elpida’s Standalone Valuation 112
    • Regression analysis perturbs all the input variables and looks for the most statistically significant drivers ofthe target (Elpida’s standalone valuation). The plots below show the regression model coefficient and thevariability explained by each independent variable in descending order of significance. These drivers are thevariables that Elpida needed to improve as a standalone entity to improve its valuation.Independent variables (affecting the firm valuation, cell B42) in descending order from most significant toleast were1:  COGS/Revenue for 10 yrs: B3  CAPEX/Revenue for 10 yrs: B8  WACC2 for Elpida (14%): B35  Depreciation & Amortization / Revenue for 10 yrs (10.8%): B7  SG&A/Revenue for 10 yrs (12%): B4  R&D/Revenue for 10 yrs (2%): B5  Revenue growth % (3.3%): B2  Tax rate for Elpida (39.1%): B10  Change in net working capital (0.81%): B9We can see that the valuation (evenwithout the debt and with much lowerdepreciation and amortization) isdeeply in the red, mainly due to its highCOGS/Revenue and highCapEx/Revenue ratios. It is not a revenue growth problem. Elpida’s high CapEx (fixed costs) were notcovered by their slim gross margins, and after subtracting other fixed costs, it kept their FCF in the red.Acquisition by a bigger company in a better financial position and with economies of scale can help improveCOGS and reduce CapEx to what can be recovered from future gross margins.Notes: 1 Only first three variables above are statistically significant 2 A WACC increase affects Elpida’s valuation positively due to faster discounting of its negative cash flows. This would change once FCF gets positive. 113
    • Exhibit 32: “Most Likely” Synergies from Elpida’s Acquisition Synergy Reasoning Revenue A 1.5% improvement was identified through a change of product mix in favor of mobile DRAM, stabilized prices and a new offering that bundles Micron’s NAND products with Elpida’s DRAM products. The pricing improvements (pecuniary economies) are assumed given Micron’s increased control on DRAM supply, reducing the likelihood of oversupply, which lowers ASPs. Cost of In the long-run, we expect a 2% reduction in product costs. We assume that Micron will absorb Elpida’s Goods know-how, improving manufacturing processes throughout the company. In the near term, we believe that improvements in manufacturing overhead are achievable by replacing Elpida’s logistics and shipping activities with those of Micron’s, while manifesting an improved bargaining position when negotiating with suppliers. SG&A A modest 5% reduction in SG&A is believed to be achievable by reviewing customers being serviced by both Micron’s and Elpida’s sales representatives. Sales channels also have to be examined for redundancies; however, in the short term, we assume that it would be best to leave most of Elpida’s sales force intact in order to minimize sales losses. R&D Overall, we see a 10% reduction in R&D. We believe that it is important for Elpida’s R&D team to remain intact. Instead of layoffs, we suggest that Micron place increased emphasis on Elpida’s R&D team, while allowing its workforce to reduce through employee attrition and retirement. The 10% reduction is reasonable giving the industry’s attrition rate of 5%-10%. CAPEX We see Micron’s purchase of Elpida reducing CAPEX expenses by $6 billion over a three year period accounting for assets (Hiroshima & RexChip facilities) gained through the acquisition.Exhibit 33: Valuation of Synergies Most Likely Case Best Case Worst Case Scenario Scenario Scenario Combined Company 9.00 14.02 1.74 (Micron + Elpida) Synergies Value Estimation 6.60 11.62 -0.66Notes:  Values are in billions of dollars.  Synergy values are calculated by subtracting the standalone values for Micron and Elpida from their combined values under the three scenarios. 114
    • Exhibit 34: Combined Valuation – Most Likely Case ScenarioAssumptions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Revenue Synergies 0% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%COGS Synergies 0% -2% -2% -2% -2% -2% -2% -2% -2% -2% -2%SG&A Synergies 0% -5% -5% -5% -5% -5% -5% -5% -5% -5% -5%R&D Synergies 0% -10% -10% -10% -10% -10% -10% -10% -10% -10% -10%Other Operating Income 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Expense, Net SynergiesCapEx Synergies 0% -50% -50% -50% 0% 0% 0% 0% 0% 0% 0%Elpida-related - $500 $250 - - - - - - - -Restructure Costs (in$M)Tax Rate 23% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Terminal Base Year 179 191 199 206 214 222 230 240 249 260 4.45%Revenue 11,930 12,746 13,234 13,735 14,255 14,795 15,364 15,970 16,620 17,319 18,069 COGS 9,551 9,712 10,079 10,459 10,854 11,264 11,697 12,158 12,653 13,185 13,756Gross Margin 2,379 3,034 3,155 3,276 3,401 3,530 3,667 3,812 3,967 4,134 4,313 SG&A Expenses 1,064 1,086 1,126 1,168 1,212 1,257 1,305 1,356 1,411 1,470 1,534 R&D 992 916 953 990 1,029 1,070 1,112 1,157 1,205 1,256 1,311 Restructure 0 500 250 0 0 0 0 0 0 0 0 Other Operating Expenses 91 95 99 102 105 109 112 117 121 126 132Operating Income(Loss) Before Taxes(EBIT) 232 936 977 1,015 1,054 1,095 1,137 1,182 1,230 1,282 1,337Net Income (Loss)After Taxes 179 721 753 782 812 843 876 910 947 987 1,030+ Depreciation &Amortization 2,621 2,981 3,098 3,219 3,344 3,475 3,612 3,756 3,911 4,076 4,253- CapEx 2,623 2,431 1,740 1,806 3,749 3,892 4,042 4,202 4,373 4,557 4,755- Change in NetWorking Capital 122 127 132 137 142 147 153 159 166 172 180Free Cash Flow 55 1,144 1,979 2,058 265 279 292 305 319 333 348 8,219 WACC 8.9% Discount Factor 1.000 0.919 0.844 0.775 0.712 0.654 0.601 0.552 0.507 0.465 0.427 0.427 PV - 1,670 1,595 189 182 175 169 162 155 149 3,513Sum of PV 5,496PV of Terminal Value 3,513Enterprise Value 9,009 115
    • Exhibit 35: Combined Valuation – Best Case ScenarioAssumptions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Revenue Synergies 0% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%COGS Synergies 0% -3% -3% -3% -3% -3% -3% -3% -3% -3% -3%SG&A Synergies 0% -7% -7% -7% -7% -7% -7% -7% -7% -7% -7%R&D Synergies 0% -15% -15% -15% -15% -15% -15% -15% -15% -15% -15%Other Operating Income 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Expense, Net SynergiesCapEx Synergies 0% -50% -50% -50% 0% 0% 0% 0% 0% 0% 0%Elpida-related - $550 $250 - - - - - - - -Restructure Costs (in$M)Tax Rate 23% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Terminal Base Year 239 257 267 277 288 299 310 323 336 350 4.45%Revenue 11,930 12,868 13,364 13,870 14,395 14,941 15,515 16,127 16,784 17,489 18,247 COGS 9,551 9,613 9,976 10,352 10,743 11,149 11,578 12,034 12,524 13,050 13,616Gross Margin 2,379 3,255 3,388 3,518 3,652 3,791 3,938 4,093 4,260 4,439 4,631 SG&A Expenses 1,064 1,063 1,103 1,144 1,186 1,231 1,277 1,327 1,381 1,439 1,501 R&D 992 866 900 935 972 1,011 1,051 1,093 1,138 1,186 1,238 Restructure 0 550 250 0 0 0 0 0 0 0 0 Other Operating Expenses 91 95 99 102 105 109 112 117 121 126 132Operating Income(Loss) Before Taxes(EBIT) 232 1,230 1,287 1,337 1,388 1,441 1,497 1,556 1,620 1,688 1,760Net Income (Loss)After Taxes 179 947 991 1,029 1,069 1,110 1,153 1,198 1,247 1,299 1,355+ Depreciation &Amortization 2,621 2,981 3,098 3,219 3,344 3,475 3,612 3,756 3,911 4,076 4,253- CapEx 2,623 2,431 1,740 1,806 3,749 3,892 4,042 4,202 4,373 4,557 4,755- Change in NetWorking Capital 122 127 132 137 142 147 153 159 166 172 180Free Cash Flow 55 1,371 2,218 2,306 522 546 569 594 619 333 674 8,219 WACC 8.9% Discount Factor 1.000 0.919 0.844 0.775 0,712 0.654 0.601 0.552 0.507 0.465 0.427 0.427 PV - 1,259 1,787 372 357 342 327 314 301 288 3,513Sum of PV 7,217PV of Terminal Value 6,805Enterprise Value 14,022Exhibit 36: Combined Valuation – Worst Case Scenario 116
    • Assumptions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Revenue Synergies 0% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%COGS Synergies 0% -1% -1% -1% -1% -1% -1% -1% -1% -1% -1%SG&A Synergies 0% -3% -3% -3% -3% -3% -3% -3% -3% -3% -3%R&D Synergies 0% -5% -5% -5% -5% -5% -5% -5% -5% -5% -5%Other Operating Income 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Expense, Net SynergiesCapEx Synergies 0% -50% -50% -50% 0% 0% 0% 0% 0% 0% 0%Elpida-related - $500 $250 - - - - - - - -Restructure Costs (in$M)Tax Rate 17% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Terminal Base Year 35.79 37.36 38.78 40.25 41.77 43.35 45.02 46.79 48.70 50.75 4.45%Revenue 11,930 12,454 12,926 13,415 13,923 14,450 15,006 15,598 16,234 16,916 17,650 COGS 9,551 9,811 10,181 10,566 10,965 11,379 11,816 12,282 12,782 13,319 13,897Gross Margin 2,379 2,643 2,744 2,849 2,958 3,071 3,190 3,316 3,452 3,597 3,753 SG&A Expenses 1,064 1,109 1,150 1,193 1,237 1,283 1,332 1,384 1,440 1,501 1,566 R&D 992 967 1,006 1,045 1,087 1,129 1,174 1,221 1,272 1,326 1,384 Restructure 0 500 250 0 0 0 0 0 0 0 0 Other Operating Expenses 91 95 99 102 105 112 112 117 121 126 132Operating Income(Loss) Before Taxes(EBIT) 232 471 490 509 529 549 571 594 618 644 672Net Income (Loss)After Taxes 193 391 407 422 439 456 474 493 513 535 558+ Depreciation &Amortization 2,621 2,981 3,098 3,219 3,344 3,475 3,612 3,756 3,911 4,076 4,253- CapEx 2,623 2,431 1,740 1,806 3,749 3,892 4,042 4,202 4,373 4,557 4,755- Change in NetWorking Capital 122 127 132 137 142 147 153 159 166 172 180Free Cash Flow 69 815 1,633 1,699 -108 -108 -110 -112 -115 -119 -124 -2,930 WACC 8.9% Discount Factor 1.000 0.919 0.844 0.775 0,712 0.654 0.601 0.552 0.507 0.465 0.427 0.427 PV - 748 1,378 -77 -71 -66 -62 -58 -55 -53 -1,252Sum of PV 3,001PV of Terminal Value -1,252Enterprise Value 1,748Exhibit 37: Sensitivity/Regression Analysis of the Combined Firm (Most LikelyCase Scenario) 117
    • Independent variables (affecting the combined-firm valuation, cell B45) in descending order from the mostsignificant to the least were:  WACC for the combined firm: B10  Revenue synergies for 10 yrs: C2  Tax rate for the combined firm: B9  CAPEX synergies for first 3 years only: C8  COGS synergies for 10 yrs: C3  R&D synergies for 10 yrs: C5  SG&A synergies for 10 yrs: C4These are the variables that Micron will needto execute on post-acquisition to maximizevalue created. Revenue and CapEx synergiesare the most obvious, but the debt/equitystructure of the firm needs to be optimized tominimize WACC in the current ultra-lowinterest rate environment. Taxes vs. variablecosts need to be optimized jointly beforedeciding in which foundry to produce whencapacity is not fully utilized. Full-fledged tax planning of production is beyond the scope of this paper.Exhibit 38: Financial Effect of Short-Term Revision in Product Mix for Year 2013 If Micron keeps the current If Micron changes product mix – % product mix (steady state from an estimated 11% improvement Change DCF in 2013) in revenue based on today’s DRAM pricesRevenue 12,746 14,148 11%COGS 9,712 9,712 0%GM 3,034 4,436 46%% GM 24% 31% 7%EBIT 936 2,338 150%Note: Revenue, COGS, Gross Margin and EBIT figures are in $M. 118
    • Exhibit 39: Financial Effect of Not Achieving the 15nm Technology Node by2016 Micron builds an operational Micron is not able to achieve the % 15nm fab by 2016 (steady state 15nm tech node Change from DCF)Revenue 14,255 14,255 0%COGS 10,854 14,255 31%GM 3,401 0 -100%% GM 24% 0% -24%EBIT 1,054 -2,346 -322%Note: Revenue, COGS, Gross Margin and EBIT figures are in $M.Exhibit 40: Stackelberg Game Model vs. Cournot Game ModelBoth models assume the “n” players are non-cooperative, price-takers, all producing a homogenousproduct. The Stackelberg model (devised by Heinrich Von Stackelberg in 1934) assumes the playersenter the market sequentially, and each player has full knowledge of previous entrants’ quantitydecisions. The Cournot model (devised by Antoine Augustin Cournot circa 1870) assumes theplayers enter the market simultaneously with no guarantees on the decisions of others. Bothmodels assume number of players is known, barriers to entry exist to keep that number fixed, andall players know the demand function and type of game. All players are assumed rational and tryingto optimize own profits. Cournot StackelbergTotal Quantity ∑ ( ) ∑ ( )Market Price (function of total Q) P(Q) = a – b Q ∀ a, b > 0 P(Q) = a – b Q ∀ a, b > 0Total Cost for Firm i (function of ( ) ∀ c, F ≥ 0 ( ) ∀ c, F ≥ 01individual quantity produced)Equilibrium Individual Quantity q . q .( )Equilibrium Total Quantity Q . Q . (1 ( ) )Equilibrium Market Price ( ) P PEquilibrium individual quantity ( ) ( ) F F ( ) ( )1Cost function was assumed identical for all players for simplicity. The model changes if the fixed/variable costs differ from oneplayer to another, but the insights stay the same. 119
    • The Stackelberg model forces players to over-produce, leading to total capacity that exceeds theCournot game with same number of players. For example, with 3 players only (n=3) the first 3players will produce 2x, 1x, 0.5x the Cournot individual-quantity respectively. This leads to 7/6times the total capacity expected for the Cournot game, resulting in a lower price overall. Individualprofit for the first player will exceed that for the second, which will exceed that of the third. TheDRAM Stackelberg commodity game benefits the early entrant, and forces chronic over-productionwith loss of potential profits. The first entrant (currently Samsung) is best shielded from the losses(Samsung in this case) 120