Micron Technology (MU) Closes Buyout Of Inotera Memories

 | Dec 06, 2016 09:49PM ET

Semiconductor solution provider Micron Technology Inc. (NASDAQ:MU) recently announced that it has completed the acquisition of the remaining stake in Taiwan’s Inotera Memories Inc. for approximately $4 billion. Micron had signed an agreement in Dec 2015 to acquire the remaining 67% stake in Inotera. With this, Micron now has 100% ownership of the aforesaid entity. The move is believed to be immediately accretive to Micron’s DRAM gross margin, earnings per share and free cash flow.

About Inotera

Taiwan-based Inotera was formed in 2003 as a joint venture between Nanya Technology Corporation and Infineon. The company provides DRAM memory foundry services, especially on 300-mm silicon wafers.

In Feb 2015, Micron revised its DRAM supply agreement with Inotera. As per the deal, it was agreed that Micron would purchase Inotera’s DRAM output at a discount to the market price. In 2009, Micron bought Infineon’s share in Inotera.

In fiscal 2014, Micron purchased approximately $2.68 billion of DRAM products from Inotera, which accounted for nearly 38% of its total DRAM gigabit production. With such a massive exposure to a single supplier, we believe that the recent deal will positively impact the memory chipmaker’s profit margins, earnings per share and free cash flow, going forward.

Benefits

It seems that the semiconductor industry is going through a massive consolidation phase as merger & acquisition activities are on the rise. According to the latest report by Semiconductor Industry Association (SIA), the worldwide semiconductor industry recorded sales growth of 11.5% and reached $88.3 billion in the third quarter of 2016. This marks the industry’s highest-ever quarterly sales. The industry is experiencing growth primarily due to developing end markets and new product offerings, supported by process and yield improvements by semiconductor manufacturers.

Continued strong adoption of tablets and smartphones, automotive electronics and the emergence of the new category of wearable devices have led to stronger demand for the processing and sensing devices that run them. These factors are likely to drive the semiconductor industry this year.

Additionally, Micron believes that the acquisition will also have some operational benefits, leading to efficient management of investment levels and cadence and alignment with global manufacturing operations.

Hence we believe that the current acquisition deal should translate to stronger results at Micron.

Price Movement

Micron has outperformed the Zacks categorized Semi-Conductor Memory industry over the last six months. Share price of Micron gained 51.5% compared with the industry’s gain of 47.9%.