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Samsung Buying SanDisk? Rumor Mill Heats Up

News outlets and blogs lit up on Friday with reports that Samsung Electronics Co., the giant Korean firm that produces almost one-third of the world's supply of flash memory, is considering purchasing SanDisk, a maker of flash memory disk drives.

News of the deal sent SanDisk (NASDAQ: NSDK) shares up 31 percent to close the day at $17.64, as five times as many shares than average traded hands on Friday, based on the rumors.

Samsung did not respond to calls from InternetNews.com for comment, but a spokesperson told Reuters ""We are looking at various opportunities regarding SanDisk, but nothing has been decided yet."

SanDisk issued a statement to all press that said "SanDisk periodically has conversations with multiple parties, including Samsung, regarding a variety of potential business opportunities. We evaluate all of these opportunities, but maintain a policy of not commenting on market rumors or speculation."

The deal, estimated by Reuters to be worth $3.2 billion, would benefit both firms, perhaps Samsung a little more than SanDisk. SanDisk would benefit from having a much richer supplier of memory products as its parent company, and having a company the size of Samsung would ease the burden of research and development as well as sales and marketing.

Samsung pays between $350 and $400 million per year to SanDisk for solid state drive (SSD) technology licenses. Not only would Samsung save on that, it would have a nice revenue stream from other SSD licensees.

Plus, it would give Samsung access to SanDisk's many patents in multi-level cell (MLC) technology, which allows for a doubling or tripling of the amount of memory each flash memory cell can hold. The technology has the capability to greatly expand capacity in the same physical space.

Toshiba loses?

The big loser would be Toshiba, Samsung's closest rival in the memory business. Toshiba is a major supplier of flash memory to SanDisk and the two have a joint fabrication plant in the works. The deal was announced in February and was scheduled to begin construction next year. SanDisk will likely not need that fabrication plant any more as part of Samsung.

"This is a win for both parties," said Nam Kim, director and chief analyst for the market research firm iSuppli. "Samsung could save money on the royalty they pay to SanDisk and get money from other companies with license income. SanDisk has good technology with MLC and they can reduce R&D expenses. Also, SanDisk can leverage more diverse memory technology from Samsung."

Bob Merritt, vice president with Semico Research, said Samsung has the money to grab SanDisk and given the size of its royalty payments, the purchase makes sense. "There's nothing in this that says it's not a good program for Samsung," he told InternetNews.com. "I just don't know where Sandisk stands in all this."

Beyond the royalties, Merritt said the deal would help Samsung's marketing position, which is it sells storage and determines what kind the customer needs, hard disk or solid state drives.

"Samsung has a very good hard drive effort, and Samsung's approach is just provide storage to the client and not make a big distinction between the two," he said. "You tell us what your need is and we'll tell you the appropriate tech and cost. I think it's a powerful story."