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Samsung Still Hot for SanDisk

Samsung clearly doesn't take no for an answer when it wants something. The world's top memory chip maker, despite being spurned on its initial $5.8B acquisition offer for SanDisk (NASDAQ: SNDK) Monday, is not giving up on what one analyst said would be a historical industry merger.

In a letter today Samsung outlined why the move is a financial win for both tech titans and refuted SanDisk's claims that the offer is not in the company's shareholders best interests. Samsung said the offer represents $26 per share in cash, which is a premium of 93 percent over SanDisk’s closing share price on September 4, the day news broke about the proposed acquisition. As of midday Wednesday, SanDisk stock was up $6.06 in trading, hitting $21.10, a 40 percent jump over yesterday's close of $15.04.

"Consumer spending and the overall economic situation have been getting worse. It will take the NAND flash market quite a bit of time to recover. Notwithstanding the current market conditions, to stay competitive, SanDisk will need to fund critical investment and development over the next several months," wrote Yoon-Woo Lee, Samsung vice chairman and CEO, to SanDisk's board of directors in a letter released publicly today.

"Our offer insulates your shareholders from the risk of market conditions that have severely deteriorated and are expected to remain challenging," he said.

The acquisition, according to industry watchers, could literally rock the market for NAND flash memory, as it would give Samsung at least 50 percent market share.

As of 2007 Samsung held 38 percent market share, with Toshiba holding 20 percent, Hynix Semiconductor claiming 15 percent and SanDisk having 11 percent, according to a Gartner report.

If the merger happened Toshiba would find itself in a very vulnerable and weak spot as its $350 million a year partnership with SanDisk would end. Due to cash flow, pundits say Toshiba can't afford to make its own play for SanDisk.

"This a compelling move for Samsung," Joseph Unsworth, research director for NAND Flash Semiconductors at Gartner, told InternetNews.com.

"Samsung would save the $350 million in royalties it's paying Toshiba, would gain technology and also gain patents. That's a big incentive to swallow SanDisk," Unsworth said.

Given the market share gains, though, Samsung would very likely face intense regulatory scrutiny but that doesn't mean it won't happen, said analysts.

"Samsung hasn't made a move like this, to buy something in decades. This is the biggest thing to happen in a very long time," said Unsworth.

Rumors about the acquisition hit the news two weeks ago and drove SanDisk stock up 31 percent.

SanDisk in the driver's seat?

One analyst said SanDisk is in a great position as it's in the driver's seat.

"It gives Samsung an opportunity to come back with a better deal not to mention an opportunity for others to step in and up the bidding, as well as for clarity around potential regulatory objections," Greg Schulz , founder and senior analyst, StorageIO, told InternetNews.com.

In his letter to SanDisk today Samsung's CEO noted he was surprised that the refusal came after just two hours of review, given the "many meetings and conversations over the last several months" about the acquisition. He wrote that the combination of SanDisk’s "innovative culture and technology leadership" and Samsung’s segment knowledge, leadership and strong systems would create a company "well positioned to accelerate the adoption of flash memory technology in new markets."

Samsung also pledged its allegiance to SanDisk employees and said it would operate the company as a subsidiary.

"We have a long term commitment to the space, financial stability and a strong desire to grow the SanDisk platform, thereby creating significant new opportunities for SanDisk employees," stated the letter. "We do not plan to cut jobs -- rather, we want to work with you to find the best way to structure incentives to retain and motivate your key talent following the transaction," wrote Lee. The CEO invited SanDisk to come back to the negotiation table for further discussions, yet isn't ruling out the possibility of a hostile takeover.

"It continues to be our strong preference to work together with the SanDisk Board to reach a mutually agreeable transaction. We again urge you to engage with us promptly in a productive discussion about our proposal," Lee wrote.