To all,
My take on the deal is I'm impressed. This is a great deal for MU, not because of the facilities they're 'buying' from TI (more anon) but because of the $750M cash. This gives them an excellent shot at surviving the bottom of this DRAM cycle. And if anybody thinks this $750M is going to be poured into an antiquated fab in Italy they're dreaming. Italy and Singapore are very much secondary issues for MU ... IMO this cash will be targeted for Boise, to keep it in the front ranks of DRAM facilities on a worldwide basis.
These are desperate times in the DRAM business and what we have here is a deal between 2 desperate players .... MU, desperate to survive, and TI, desperate to get out. In this context I think MU has structured a helluva deal. Bottom line is they get $750M cash on closing (estimated to be Sept. 30).
As to the facilities they're getting ... well TI lost $129M on them in the March quarter when chip prices were a heck of a lot higher than they are now ... my guess is that they're losing about $200 million a quarter now. These are not losses that MU will be able to staunch quickly (MU's operating loss on Boise in the May quarter was $169M). MU plans to upgrade the TI and joint venture fabs to its process technology but said on the cc that this will take 10-18 months depending on the facility ... and this upgrade won't start until after closing at the end of Sept. ... so you're looking at late '99 before these fabs start to achieve Boise-like efficiencies ... and Boise is losing $140M a quarter (before the $30M inventory writedown) ... hold on, that was with chip prices at $2.50 ... they're now $1.50 (BTW Larry, what did you think when Don Baldwin said on the call that they get a 3-5% premium for PC 100 chips?) ... so why is MU buying antiquated facilities that are losing money hand over fist rather than just going out and expanding Boise???? .... the answer is 750 million green ones. Despite the millstone of the TI plant, the cash gives them a better chance at playing the next round ... these are desperate times ...
Why would TI do this deal, especially the $750M cash part of it? Obviously, they would rather put this into the DSP business rather than MU ... BTW, TI had cash and equivalent of $2.4 billion at latest report (March quarter). However, if you net out debt it gets reduced to $1.1 billion. So to take most of that and shove it into MU must have been a bitter pill to swallow. On the other hand they're losing $200M per quarter in memory, they have commitments to their JV partners, to the Italian government ($190M), likely to the Singapore government (interesting how it's Twinstar, the plant in the land of free enterprise that gets shut down), etc... How much would it cost and how long would it take to disentangle all that and shut it down themselves? ... and there's no upside to that scenario. Here, they have a shot at upside (odds which are are vastly improved by the cash they're putting in) and they're out of memory quick and clean. But it does use up almost all of their net cash resources ... desperate times ...
This deal illustrates how scrappy and tenacious Appleton is ... I seriously think that if the stock gets cheap enough ($5-$10 range) and if we get more DRAM dropouts (Twinstar being the most recent)you have to look at MU as away to play the next up cycle.
regards, Mike |
