Micron Technology Inc. may be an attractive acquisition target but it should not be on the acquisition menu of China’s Tsinghua Unigroup Ltd. as reported earlier this week by many news outlets. In fact, considering the likely regulatory opposition to the deal, it shouldn’t even be seriously considered by a Chinese company. This transaction doesn’t sound credible and it will most likely not happen because shareholders willing to sell their stakes will find the road blocked by not just regulators in the U.S. but also in Europe and Japan.
Aside from normal regulatory approvals, Tsinghua must also obtain U.S. Congressional clearance, which is unlikely to happen without the imposition of major concessions that will make Micron a less attractive target for the China-based buyer. So why exactly is Tsinghua reportedly planning to make this offer – if the report is true – and why did the company pick Micron instead of a transaction involving any of a dozen or more smaller U.S. semiconductor suppliers that regulators might be more inclined to approve?
The likely explanation is that China wants to test the limits of U.S. opposition to its enterprises’ ownership of key American technology companies. Even if an offer for Micron falls through, a review of the deal will force the U.S. government to fully disclose justifications for the rejection. Those reasons would have to be credible, be internationally acceptable and be based on better reasoning than the often purely politically-motivated objections Congressional representatives have raised about similar deals in the past.
China obviously has good reasons for seeking an end to what it must consider knee-jerk “No” responses to offers by its biggest enterprises to purchase Western companies, especially those in the technology sector. Most Western governments not only forbid the transfer of so-called dual-use technologies to China but also block certain acquisitions and have laws banning Chinese enterprises from bidding for major public work contracts.
If true, a bid by Tsinghua for Micron will fall into one of the above categories. The company reportedly wants to offer $23 billion, or $21 per share, for the U.S. memory chip producer, representing a premium of about 19 percent on the stock’s closing price a day before the news was reported by several outlets. The Tsinghua group is wholly-owned by China’s Tsinghua University, one of the country’s top higher education institutions.
The group has attracted investments from Intel Corp., the world’s biggest semiconductor vendor, which reportedly acquired a 20 percent stake in Tsinghua in 2014. Tsinghua Unigroup has also been busy acquiring technology firms in China; last year it snapped up design firms Spreadtrum and RDA Microelectronics.
A bid to expand Tsinghua’s interest outside of China and deep into the heart of the global semiconductor market would seem to make sense. The purchase of a major Western company would be the optimal vehicle for achieving the company’s goal of becoming a global player in the absence of approval of direct technology transfer by American and European governments. However, the reported offer to purchase Micron still appears suspicious and lacks credibility on several grounds.
First, Micron shareholders are unlikely to accept the reported $21 per share offer. While the company’s stock price and market value has fallen in the last year, the 19 percent premium Tsinghua reportedly wants to offer undervalues Micron and appears incredibly low for a serious bidder since it is based on Micron’s valuation only a few days prior to the report of the offer. Micron’s stock price has traded in the range of $17.14 and $36.59 in the last 12 months and closed as high as $27.08 at the beginning of June.
A serious offer would instead be based on the average price of the company’s stock price over the course of the last several weeks to several months rather than in just the prior day when valuations had dropped sharply.
Second, a serious bidder would have to consider the likely regulatory and political objections and ensure shareholders would be solidly behind their offer by sweetening the deal heavily. The Tsinghua offer does not rise to this level.
Regulatory objections will be swift and deadly to the transaction because not only is Micron one of the world’s biggest chipmakers and a leading vendor of memory semiconductors but also because its products are sold to a wide range of buyers, including PC vendors, consumer electronics manufacturers, server OEMs and also branches of the U.S. government like the Department of Defense, (DoD).
Notwithstanding the outsourcing of U.S. manufacturing to China and the country’s rise as a production center for many Western OEMs, there are still major gaps between the Chinese government and rival governments – yes, rivals – in Europe and North America. Strong restrictions barring the transfer of certain technologies to China by Western companies are still in place and an offer to purchase Micron by a non-American company is definite to come under intense regulatory scrutiny.
Members of Congress, too, will be highly interested and many of them will be opposed to such a deal. The chances of such a transaction receiving Congressional and regulatory endorsement in today’s environment is nil especially ahead of presidential elections next year.
Additionally, Micron has over the last five years played the role of a consolidator in the DRAM market, helping to mop up excess supplies and production capacity. The market is littered today with the carcasses of numerous companies that have fallen in what is probably one of the toughest segments of the electronics components market.
Micron's huge appetite for acquisitions resulted in almost a doubling of its revenue in two years, a feat few companies have been able to record in the history of the technology market. In the fiscal year ended August 28, 2014, Micron’s revenue rose to $16.4 billion from $9.1 billion in the prior year and $8.2 billion in fiscal 2012. The jump in revenue was largely due to Micron’s purchase of companies like Elpida, Rexchip Electronics, Virtensys, Numonyx, Lexar and Toshiba’s DRAM unit. A listing of acquisitions on the company’s website shows how Micron has transformed itself rapidly in the last five years.
I don’t have any insider information about the purported offer for Micron by Tsinghua but I’m convinced this deal won’t happen, certainly not as reported. However, what it will show is that China can use the West’s capitalist rules and regulations against those who object to its efforts to acquire foreign enterprises and technologies.
China won’t get Micron this time but by floating the mere concept of such a transaction it will achieve several objectives: expose “irrational” Western objections to what should be purely business deals; figure out what its companies must do to win major Western enterprises and; eventually peel away some key Western enterprises by wearing down regulators and politicians.
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.