Bottom line: Micron’s decision to discourage a buyout offer from China’s Unigroup is a bargaining tactic due to high regulatory risk, and Unigroup is likely to come back with a sharply raised offer in the next 2 weeks.
A week after splashing into the headlines, a potential bid by China’s Tsinghua Unigroup for Micron Technology (Nasdaq: MU) is being cast into doubt, with word that the leading US memory chip maker is worried such a deal would get vetoed by Washington on national security grounds. The development comes as a slight surprise to me, as I previously predicted that such a deal would ignite some controversy but would ultimately get approved by the Committee on Foreign Investment in the United States (CFIUS), which conducts reviews for national security risks.
It’s quite possible that Micron really doesn’t want to proceed with talks because it believes there’s a big enough chance that such a deal could get vetoed in Washington. But that said, it’s also quite possible that Micron could quickly resume the talks if Unigroup offers a higher price than the previous $21 per share being discussed, and that all of this is just a bargaining tactic.
This particular saga began a week ago, when media reported that Unigroup, a company with close ties to Beijing, was preparing to make its $21-per-share bid for Micron, in a deal that would value the chipmaker at $23 billion. (previous post) Some argued the deal would get vetoed due to Micron’s status as the leading US memory chip maker and its large portfolio of high-tech know-how. But others said Micron’s technology is widely available throughout the world, making a veto less likely.
The latest reports now say that Micron has quietly told Unigroup it doesn’t want to pursue a deal, due to the probability of a veto by CFIUS. (English article) Micron delivered its view after Unigroup officials expressed their formal interest in pursuing an acquisition late last week, the reports say. They add that Micron has consulted but not hired an investment bank because it doesn’t want to pursue a deal.
As a former reporter, I can say with almost 100 percent confidence that this particular news is coming from sources at Micron, which means the leak was almost certainly a strategic decision with additional motivations. That could mean that Micron is simply telling Unigroup that its $21 offer price is too low, and it will need to raise the figure considerably for Micron to go to the trouble of pursuing a deal that has a significant risk of getting rejected.
Investors certainly didn’t see things that way, with Micron’s shares tumbling 6 percent in the latest trading session to $18.89, or 10 percent below the planned offer price. The shares had risen as high as $20.12 after the news was first reported last week. But it’s also worth noting that Micron’s stock has lost about half of its value over the last 7 months due to stiff competition in the market for computer memory that is used to power most of today’s electronic devices.
This rebuff from Micron means the ball is now in Unigroup’s court, and the Chinese company will have to decide whether to come back with a significantly higher offer, perhaps around $30 per share. That would mean Unigroup would have to pay a lot more for Micron, well over $30 billion, for a deal that might not even get approved.
If this were a rational, market-driven situation I would say that Unigroup would give up on the offer and this would be the end of the story. But in this instance, I really believe that political forces are involved and Unigroup is being strongly supported by the central government. China is already the biggest buyer of memory chips and Beijing would desperately like to become a global player in the microchip market. Accordingly, I predict that Unigroup will come back with a sharply higher bid soon, in perhaps 1-2 weeks, and that the 2 sides will resume their talks at that point.