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Team Assignment III: Capstone Paper

Analysis of the Acquisition of

Elpida Memory, Inc. by Micron Technology, Inc.

MGMT 619 ▪ Fall 2012 ▪ Prof. Tammy L. Madsen

Adi Aloni Gabriel Bowers Vijay Karakala

Olena Marchenko Rafik Mikhael Carla Nunes Alex Reitor

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TABLE OF CONTENTS

I. WALL STREET JOURNAL ARTICLE AND EXECUTIVE SUMMARY ............................... 7

I. A. WALL STREET JOURNAL ............................................................................................................ 7

I. B. EXECUTIVE SUMMARY ............................................................................................................. 10

I. B1. Strategic Move ...................................................................................................................... 10

I. B2. Major Issues .......................................................................................................................... 10

I. B3. Key Analysis ......................................................................................................................... 11

I. B4. Final Recommendation ......................................................................................................... 12

II. EXTERNAL ANALYSIS ....................................................................................................13

II. A. INDUSTRY DEFINITION ............................................................................................................. 13

II. B. SIX FORCES ANALYSIS ............................................................................................................. 13

II. B1. Level One Analysis ............................................................................................................... 13

II. B2. Level Two Analysis ............................................................................................................... 13

II. B3. Level Three Analysis ............................................................................................................. 16

II. C. MACRO ENVIRONMENTAL FORCES ANALYSIS, ECONOMIC TRENDS AND ETHICAL CONCERNS ............17

II. C1. Global ...................................................................................................................................17

II. C2. Social .................................................................................................................................. 18

II. C3. Technological ....................................................................................................................... 18

II. C4. Governmental/Political ........................................................................................................ 19

II. C5. Ethical ................................................................................................................................. 20

II. C6. Macroeconomic Trends ........................................................................................................ 21

II. C7. Demographic Trends ............................................................................................................ 21

II. D. COMPETITOR ANALYSIS ........................................................................................................... 21

II. D1. Firm’s Competitors ............................................................................................................... 21

II. D2. Primary Competitors ............................................................................................................ 22

II. D3. Primary Competitors’ Business Level and Corporate Level Strategies .................................... 24

II. D4. How Competitors Achieve their Strategic Position ................................................................ 26

II. D5. Value Minus Cost Analysis.................................................................................................... 28

II. D6. Comparative Financial Analysis ............................................................................................ 31

II. D7. Implications of Competitor Analysis ...................................................................................... 32

II. E. INTRA-INDUSTRY ANALYSIS...................................................................................................... 33

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II. E1. Industry Evolution and Formation of Strategic Groups ........................................................... 33

II. E2. Strategic Industry Groups ..................................................................................................... 34

II. E3. Mobility Barriers, Threats and Opportunities ......................................................................... 35

II. E4. Competitive Dynamics ......................................................................................................... 36

II. E5. Firm’s Competitive Position ...................................................................................................37

II. F. THREATS AND OPPORTUNITIES ANALYSIS .................................................................................. 38

II. G. SUMMARY OF EXTERNAL ANALYSIS ........................................................................................... 38

III. INTERNAL ANALYSIS .....................................................................................................39

PART 1 – MICRON ...................................................................................................................39

III. A. BUSINESS DEFINITION/MISSION ................................................................................................ 39

III. B. MANAGEMENT STYLE .............................................................................................................. 39

III. C. ORGANIZATION STRUCTURE, CONTROLS AND VALUES ................................................................ 40

III. C1. Organizational Structure ..................................................................................................... 40

III. C2. Organizational Controls ...................................................................................................... 41

III. C3. Organizational Values ......................................................................................................... 41

III. D. STRATEGIC POSITION DEFINITION ............................................................................................. 42

III. D1. Corporate Level .................................................................................................................. 42

III. D2. Business Level .................................................................................................................... 45

III. D3. Resources & Capability Level ............................................................................................... 45

III. E. FINANCIAL ANALYSIS ............................................................................................................... 45

PART 2 – ELPIDA ....................................................................................................................47

III. A. BUSINESS DEFINITION/MISSION ................................................................................................ 47

III. B. MANAGEMENT STYLE .............................................................................................................. 47

III. C. ORGANIZATION STRUCTURE, CONTROLS AND VALUES ................................................................ 48

III. C1. Organizational Structure ..................................................................................................... 48

III. C2. Organizational Controls ...................................................................................................... 48

III. C3. Organizational Values ......................................................................................................... 49

III. D. STRATEGIC POSITION DEFINITION ............................................................................................. 50

III. D1. Corporate Level .................................................................................................................. 50

III. D2. Business Level .................................................................................................................... 52

III. D3. Resources & Capability Level ............................................................................................... 52

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III. E. FINANCIAL ANALYSIS ............................................................................................................... 52

IV. ANALYSIS OF THE EFFECTIVENESS OF THE STRATEGY ..........................................53

IV. A. IS ACQUISITION THE RIGHT MOVE? ............................................................................................ 53

IV. A1. Make vs. Buy ...................................................................................................................... 54

IV. A2. Ally or Acquire .................................................................................................................... 54

IV. A3. Porter’s Tests ...................................................................................................................... 54

IV. B. COMBINED RESOURCES AND CAPABILITIES, V-C, AND INDUSTRY CONDITIONS ............................... 55

IV. C. M&A VALUATION ................................................................................................................... 56

IV. C1. Most Likely Case Scenario ................................................................................................... 56

IV. C2. Best Case Scenario ............................................................................................................. 56

IV. C3. Worst Case Scenario ........................................................................................................... 57

IV. C4. Valuation Conclusion .......................................................................................................... 57

IV. D. OTHER CRITICAL ISSUES ........................................................................................................... 58

V. RECOMMENDATIONS .....................................................................................................59

V. A. SHORT-TERM AND LONG-TERM RECOMMENDATIONS ................................................................. 59

V. A1. Short-Term Recommendations ............................................................................................ 59

V. A2. Long-Term Recommendations ............................................................................................. 61

V. B. STRATEGY IMPLEMENTATION ................................................................................................... 63

V. B1. Implementation of Short-Term Recommendation: Revise Product Mix .................................. 63

V. B2. Implementation of Long-Term Recommendation: Partner with Intel for DRAM Process

Development ................................................................................................................................. 64

V. C. RECOMMENDATIONS FOR CORPORATE SOCIAL RESPONSIBILITY & ETHICS ..................................... 65

V. C1. Short-Term Recommendation .............................................................................................. 65

V. C2. Long-Term Recommendation ............................................................................................... 66

VI. CONCLUSIONS ................................................................................................................67

VII. BIBLIOGRAPHY ...............................................................................................................69

VIII. MAIN APPENDIX ..............................................................................................................76

IX. FINANCIAL BACKGROUND APPENDIX ....................................................................... 103

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LIST OF EXHIBITS

EXHIBIT 1: DRAM INDUSTRY DIAGRAM .............................................................................................. 76

EXHIBIT 2: SIX FORCES ANALYSIS – LEVEL ONE ................................................................................ 76

EXHIBIT 3: DRAM CAPACITY AS A KEY REVENUE DRIVER ................................................................. 84

EXHIBIT 4: COST LEADERSHIP – SAMSUNG LEADING THE PACK ..................................................... 84

EXHIBIT 5: “THE GREAT IT SHIFT” – SMARTPHONES AND TABLETS OVERTAKE DESKTOPS AND

NOTEBOOKS ........................................................................................................................................ 85

EXHIBIT 6: GROWTH AND DRIVERS FOR GLOBAL DATA TRAFFIC MEASURED IN EXABYTES ......... 85

EXHIBIT 7: VRIO ANALYSIS ................................................................................................................. 86

EXHIBIT 8: VALUE DRIVERS AND VALUE ESTIMATIONS .................................................................... 88

EXHIBIT 9: VALUES, COSTS AND PRICES ........................................................................................... 89

EXHIBIT 10: PRIMARY COMPETITORS FINANCIAL RATIOS ................................................................ 91

EXHIBIT 11: ANALYSIS OF ACQUISITIONS .......................................................................................... 95

EXHIBIT 12: ANALYSIS OF PARTNERSHIPS ........................................................................................ 95

EXHIBIT 13: BCG MATRIX FOR MICRON .............................................................................................. 98

EXHIBIT 14: MICRON’S VALUE CHAIN ................................................................................................. 98

EXHIBIT 15: ELPIDA’S ORGANIZATION CHART .................................................................................. 99

EXHIBIT 16: ELPIDA’S CORPORATE GOVERNANCE BODIES AND COMMITTEES .............................. 99

EXHIBIT 17: ELPIDA’S VALUE CHAIN ................................................................................................. 100

EXHIBIT 18: ALLY OR ACQUIRE FRAMEWORK FOR ELPIDA’S ACQUISITION .................................. 100

EXHIBIT 19: COMBINED COMPANY’S VALUE MINUS COST ............................................................. 101

EXHIBIT 20: COMBINED COMPANY’S VRIO ANALYSIS .................................................................... 102

EXHIBIT 21: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS MICRON .............................. 103

EXHIBIT 22: CAPEX AND R&D EXPENDITURES – INDUSTRY AVERAGE VERSUS MICRON .............. 103

EXHIBIT 23: MICRON’S STANDALONE VALUATION ......................................................................... 104

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EXHIBIT 24: MICRON’S GROWTH FORECAST ................................................................................... 105

EXHIBIT 25: MICRON’S GROWTH FORECAST FOR FCF COMPONENTS ........................................... 106

EXHIBIT 26: MICRON’S WACC CALCULATION ................................................................................... 107

EXHIBIT 27: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS ELPIDA ................................ 109

EXHIBIT 28: ELPIDA’S STANDALONE VALUATION .......................................................................... 110

EXHIBIT 29: ELPIDA’S GROWTH FORECAST ...................................................................................... 111

EXHIBIT 30: ELPIDA’S GROWTH FORECAST FOR FCF COMPONENTS ............................................. 112

EXHIBIT 31: SENSITIVITY / REGRESSION ANALYSIS FOR ELPIDA’S STANDALONE VALUATION .... 112

EXHIBIT 32: “MOST LIKELY” SYNERGIES FROM ELPIDA’S ACQUISITION ........................................ 114

EXHIBIT 33: VALUATION OF SYNERGIES .......................................................................................... 114

EXHIBIT 34: COMBINED VALUATION – MOST LIKELY CASE SCENARIO ........................................... 115

EXHIBIT 35: COMBINED VALUATION – BEST CASE SCENARIO ........................................................ 116

EXHIBIT 36: COMBINED VALUATION – WORST CASE SCENARIO .................................................... 116

EXHIBIT 37: SENSITIVITY/REGRESSION ANALYSIS OF THE COMBINED FIRM (MOST LIKELY CASE

SCENARIO) .......................................................................................................................................... 117

EXHIBIT 38: FINANCIAL EFFECT OF SHORT-TERM REVISION IN PRODUCT MIX FOR YEAR 2013 ... 118

EXHIBIT 39: FINANCIAL EFFECT OF NOT ACHIEVING THE 15NM TECHNOLOGY NODE BY 2016.... 119

EXHIBIT 40: STACKELBERG GAME MODEL VS. COURNOT GAME MODEL ...................................... 119

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I. WALL STREET JOURNAL ARTICLE AND EXECUTIVE

SUMMARY

I. A. Wall Street Journal

Tech Micron's Purchase of Elpida Seen as Positive for Chip Industry By Juro Osawa And Lorraine Luk 735 words 3 July 2012 07:17 AM The Wall Street Journal Online WSJO English Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved.

Micron Technology Inc.'s acquisition of Elpida Memory Inc. is good news for other major suppliers of computer memory chips in Asia, as industry consolidation will likely help ease the oversupply problem that has been plaguing the market for years.

When Micron takes over the failed Japanese rival and streamlines its operations, the whole industry could benefit from more subdued supply and higher prices of dynamic random access memory, or DRAM, chips, analysts said.

"Longer term, as the industry consolidates, we predict more rational supply behavior and hence higher and more stable profits for survivors," Sanford Bernstein analyst Mark Newman wrote in a report after Micron announced the $2.5 billion deal Monday.

With the Elpida acquisition, Micron will overtake South Korea's SK Hynix Inc. to become the world's second-largest DRAM maker by revenue, behind another South Korean company, Samsung Electronics Co. DRAM chips are widely used in personal computers and mobile devices.

While there are several smaller Taiwanese players, analysts expect the DRAM market to become increasingly dominated by Samsung, Micron and Hynix.

Micron's deal, expected to close in the first half of next year, comes at a time many DRAM makers are trying to emerge from losses due to weak chip prices. After DRAM makers kept building capacity to increase or maintain market share, the sector became a market with few winners. As DRAM chips used in PCs have become highly commoditized and prices have remained weak in recent years, many players are struggling to make money.

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Elpida, Japan's only DRAM maker, filed for bankruptcy protection in late February after struggling to repay hefty debts amid falling chip prices and as the yen's strength eroded its overseas profits.

Shortly after Elpida's collapse, DRAM prices rose on expectations for a tighter global supply.

"The consolidation of the DRAM market set off by Elpida's bankruptcy and the subsequent purchase by Micron is bringing new stability to DRAM pricing," said Mike Howard, IHS iSuppli analyst, in a report.

Thanks to more stable chip prices, the global DRAM industry's overall revenue is expected to rise 3.3% this year to $30.5 billion, after it plunged 25% last year, according to IHS iSuppli.

Micron, which was selected as Elpida's potential financial sponsor in May, said Monday that it agreed to buy the Japanese company for $2.5 billion.

Sanford Bernstein's Mr. Newman expects Micron to convert some of Elpida's DRAM facilities to produce NAND flash memory chips instead, while the U.S. company may also shut down the Japanese firm's least efficient facilities. This process, he said, would result in more subdued DRAM chip supplies. DRAM and NAND chips are different types of memory chips, and mobile devices such as smartphones use both.

On Monday, Micron Chief Executive Mark Durcan declined to provide any details about converting Elpida's DRAM capacity to flash memory chips, but said it was something that Micron could do to address market demand.

While the expected increase in Micron's global market presence could mean more challenges for rivals Samsung and Hynix, analysts say the South Korean companies are also well positioned to benefit from industry consolidation and more stable chip prices.

Samsung and Hynix declined to comment on whether or how Micron's acquisition might affect them.

By contrast, the environment remains tougher for Taiwanese players such as Nanya Technology Corp., Inotera Memories Inc., a joint venture between Micron and Nanya, and Winbond Electronics Corp.

As Taiwanese players have few advantages against larger South Korean players, there may be more consolidation in Taiwan's DRAM industry over the next few years, analysts say.

While more stable DRAM prices would be positive for Taiwanese players, too, their ability to take advantage of the improving environment is limited because they are already too far behind the first-tier players like Samsung and Hynix in terms of technology and market presence, said William Wong, an analyst at Taiwan's Fubon Securities.

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Nanya and Inotera declined to comment on their competitive environment or possibility of consolidation. Winbond couldn't be reached immediately for comment.

Jung-Ah Lee contributed to this article.

Write to Juro Osawa at juro.osawa@dowjones.com [mailto:juro.osawa@dowjones.com] and Lorraine Luk at lorraine.luk@dowjones.com [mailto:lorraine.luk@dowjones.com] and Lorraine Luk at

Dow Jones & Company, Inc.

Document WSJO000020120703e873006el

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I. B. Executive Summary

Micron Technology, Inc. (Micron) designs, manufactures, and sells semiconductor memory

products of three main types – DRAM, NAND flash, and NOR flash. These products are used

in multiple applications, such as PCs and notebooks, mobile devices, servers and consumer

electronics, as well as in automobiles and medical devices. This paper focuses on the

DRAM business, in which Micron is the only American-based company left. The other

major players in this space are South Korean companies Samsung Electronics (Samsung)

and SK Hynix (Hynix), and Japanese Elpida Memory, Inc. (Elpida). This paper focuses on

Micron’s DRAM business.

I. B1. Strategic Move

In July 2012, Micron has agreed to acquire Elpida for a total of about $2.5B, out of which

$750 million is to be paid immediately, while the rest is to be paid in annual, interest-free

installments. Micron was already acting as Elpida’s financial sponsor since May 2012, a few

months after Elpida filed for bankruptcy, in February 2012. This move will position Micron

as the second largest memory company after Samsung. With the acquisition, Micron also

gains significant presence in the mobile DRAM market where currently it is not a

meaningful player.

I. B2. Major Issues

Industry: The DRAM industry is generally an unfavorable one, with intense rivalry and a

trend of commoditization that makes it difficult for player to compete. The fact that

incumbents are relatively protected from new entrants (due to the high barriers to entry)

is hardly helpful for survival. The costs to build a fab and to make it fully functional are

above $6B, excluding R&D. At the same time, the Total Addressable Market (TAM) for

DRAM products is estimated at only $25B. The intense technology race is currently slowed

somewhat by difficulties in achieving the next technology node level. This, on one hand,

represents an opportunity to close gaps between competitors. On the other hand, any

player that is not yet engaged in the efforts to go up to the next level will find itself in a

disadvantage in 2-3 years.

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Competition: The industry is highly concentrated, with the above mentioned four

companies representing 91% of the market. Samsung is the strongest competitor with two

main factors that play to its advantage – forward integration into mobile devices and

consumer electronics, and a positive feedback loop of investments in future technology that

enable lower costs, higher margins, and better profits, which are, in turn, invested back in

technology. Those factors help Samsung remain profitable even in the downturns of the

semiconductor cycle. Hynix is the second largest competitor. Hynix experienced sharp

swings in profitability in recent years, yet it currently holds a strong position with mobile

devices manufacturers in China. Elpida is a DRAM-only company with the third largest

market share in DRAM. It is known for its low-power, high-quality mobile DRAM products,

and it is Apple’s main supplier of DRAM. It holds a strong technological position, but the

expenditures that were required to achieve that position burdened its debt level to the

point of bankruptcy. Micron held the fourth largest market share in DRAM. It is positioned

well in server and specialty DRAM, but lacks presence in mobile DRAM, which is the fastest

growing and most profitable segment. In the current market dynamics, Samsung is the

only competitor that holds sustainable advantages and is relatively secure in its position.

The other competitors are playing a technology catch-up game with Samsung and trying to

create value by appealing to market niches.

I. B3. Key Analysis

Our analysis shows that acquiring Elpida is a good move for Micron. The acquisition

successfully withstands various tests, such as “Ally or Acquire” and Porter’s three tests. In

addition, our DCF model shows that in the “Most Likely Case” and in the “Best Case”

scenarios, the value of the combined entity is greater than the value of each company

standalone. The synergies are derived mainly from three areas: 1) Revenue – with Elpida’s

mobile DRAM capabilities, we assume that Micron will ramp up production of mobile

DRAM, thus increasing revenue of the combined company, 2) Cost of Goods – Elpida

achieved a more advanced technology node than Micron. We assume that Micron will use

the knowledge from Elpida to migrate its fabs to a higher node, thus improving its COGS (a

higher node means more chips on each wafer, so the cost of each chip is lower) and

profitability, and 3) Capital Expenditures – with the acquisition of Elpida, Micron is

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essentially buying two operational fabs at about a third of the cost of building one fab in the

same technology node.

From a Value Minus Cost perspective, the combined company offers higher value and

improved costs over each company standalone. Micron was a negligible force in the mobile

DRAM space, but, with the acquisition of Elpida, it strengthens its offering and inherits

coveted customers. Micron can leverage its mobile offering further by bundling its NAND

flash products with Elpida’s DRAM, an offering that is quite valuable to mobile customers.

Server and Specialty DRAM will also benefit from the technological expertise that Elpida

offers.

I. B4. Final Recommendation

In order to reap the most benefit from the acquisition, Micron has to act fast. In the short-

term, its efforts need to concentrate on three main areas: 1) Integrate Elpida quickly into

Micron, to allow Micron the most control over Elpida’s operations, 2) Improve its product

mix, preferably towards the more profitable mobile DRAM, and 3) Migrate Elpida’s

advanced technology into Micron’s fabs to achieve better COGS.

In the long term, we believe that the key to remain competitive in this market is to break

Samsung’s positive feedback loop, or find a way to imitate it to compete on the same level.

Micron is not capable of doing it by itself, so we suggest three non-mutually-exclusive

alternatives: 1) A merger with Hynix, 2) Getting acquired by Apple, which has a strong

incentive to limit Samsung’s growth, and 3) Develop the next generation of DRAM products

together with Intel, in a similar fashion that was implemented for their NAND joint venture

– IMFT. Intel has equity stake in the sole manufacturer of the equipment that is required

for the next technology node, and it can help Micron get better access to that critical

resource. Intel will benefit from the partnership by limiting Samsung’s growth, and by

making sure that it has the complementary DRAM needed for its Atom mobile processor.

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II. EXTERNAL ANALYSIS

II. A. Industry Definition

Micron competes directly in the Memory Chip & Module Manufacturing (“Memory”)

industry (Hoover's, 2012). This industry is part of the broader Semiconductor and Related

Device Manufacturing (NAICS: 334413) industry, where players engage in the

manufacturing of semiconductor and related devices parts (IBISWorld, 2012). The

Memory industry (see Exhibit 1) focuses primarily on the design and manufacturing of

memory components with diverse applications in personal computers, networking,

storage, mobile telecommunications and consumer electronics products. Given the nature

of Elpida’s position in the specific DRAM market, this analysis will focus on the DRAM

segment of the Memory industry.

II. B. Six Forces Analysis

II. B1. Level One Analysis

Exhibit 2 contains a Level One Analysis for the DRAM industry.

II. B2. Level Two Analysis

Threat of Entry/Barriers to Entry

The high fixed costs (time and money) are a large deterrent to market entry. A firm

would require two years to build a facility and another one or two years to ramp

memory production. This increasing cost is exceptionally prohibitive given the

average DRAM TAM that has remained at about $25B since 2000 (Credit Agricole

Securities, 2012). The combination of unpredictable long-term market developments

and a tendency for the incumbent firms to oversupply the DRAM market is also a

deterrent to market entry. The incumbent advantages owned by the largest four

players span broad product portfolios covering various markets. These firms share

their large patent portfolio over cross-licensing agreements, as well as form a linkage

of intellectual property and know-how that a new firm would need to overcome if

entering the market.

Threat of Rivalry

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The DRAM industry is mature and highly concentrated (CR4 = 91%), and it is growing at a

decreasing rate. In addition, firms employ similar technological processes to manufacture

their products, as there is a strong dependence of DRAM capacity as a driver for revenue

(see Exhibit 3), as opposed to firms gaining share through differentiated offerings. Those

that are unable to maintain steady R&D and process investments are eventually pushed out

by lower cost and more technologically advanced competition. Exhibit 4 identifies the

constant race for firms to achieve cutting-edge cost process nodes in order to maintain a

competitive variable cost structure. While each technology node reduces the variable costs

per product the increasingly higher levels of investments raises the overall break-even

point requiring the firm to sell even more DRAM memory. Despite the strong requirement

to commoditize in the PC space, DRAM firms are seeking ways to differentiate within

customer segments in order to raise Average Selling Prices (ASPs) and attract higher

revenues.

Threat of Suppliers/Supplier Power

DRAM buyers are a small percentage (11.6%) of the total semiconductor buyer group. The

CR1 of the key supplier categories is greater than 75%, each nearly forming a monopoly.

These equipment categories face high fixed costs and long-term support, requiring them to

serve a large majority of the market in order to stay profitable, and creating high (and near

impossible) switching costs for equipment buyers due to suppliers’ high concentration.

DRAM firms typically require 3-4 years from developing their semiconductor process until

production ramp up, further increasing their dependence on equipment availability and

support from suppliers. Other forms of supply (labor, utilities, shipping, and financing) are

considered easily attainable in most geographic locations; however, their impact is not

considered to counter-weight the unfavorable forces of equipment suppliers.

Threat of Buyers/Buyer Power

PCs and Notebooks [40% Market Share]: PC and notebook manufacturers place the highest

cost pressure on DRAM firms and face low switching costs due to standardized interfaces

and low requirements for differentiation. A main driver for these firms is cost of goods

given the low gross margins and low differentiation among computers and laptops.

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Mobile Devices (Tablets & Smart Phones) [20% Market Share]: Mobile tablets and

smartphones are a growing segment with a medium level of concentration (CR4 = 58%).

Mobile DRAM products are more differentiated, with mobile buyers valuing small size, low

power, reliability, and ample manufacturing capacity. DRAM firms may reduce switching

costs by providing ample manufacturing capacity and leading edge technologies.

Servers [15% Market Share]: Servers represent the highest concentration ratio (CR4 =

78%) of the buyers segment. These customers differentiate DRAM based on speed, low

latency, and high reliability. Switching costs are slightly higher than in Mobile DRAM given

the efforts that server vendors spend in quality DRAM products for long-term reliability.

Despite their higher consumptions of DRAM (24-48GB/server), DRAM total share of

product costs is close to10%.

Specialty Memory [5% Market Share]: The specialty memory market is believed to be the

most attractive group given its high differentiation and relaxed focus on power

consumption or size. These firms enable high switching costs by favoring DRAM products

that are promised to be in production for long periods of time and are qualified for high

reliability across increased temperature ranges. This market is thought to have high gross

margins, leading to overall favorable buyer power conditions for this segment.

Summary: Despite high concentration and general pressure placed on DRAM ASPs, the

DRAM firms have found opportunities to raise switching costs based on differentiation that

represents value to the various buyer groups.

Threat of Substitutes

New, non-volatile high speed memory technologies are in development, yet they have not

reached a level of performance that can disrupt the DRAM industry. Micron has launched a

version of RRAM (Resistive Random Access Memory) called PCM (Phase Change Memory)

on their 45nm process. The memory is in low-volume production and still lags in

performance (speed and bandwidth) compared to DRAM.

Role of Complements

DRAM is required in all consumer electronics; nonetheless, the value-added and pull-

through are determined by the NAND and CPU components. The high switching costs for

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CPUs in the form of both hardware and software redesign is beneficial to the DRAM

industry. Also, while NAND itself has a low switching cost, memory firms that sell both

types of memory (e.g. Samsung, Hynix, Micron) have developed low-profile high-

performance multichip packaging (MCP) solutions that increase overall value in the mobile

market. An unfavorable factor comes from the capabilities of NAND and CPU firms to have

equipment and technology know-how to enter the DRAM market if industry conditions are

to improve.

II. B3. Level Three Analysis

Force Affecting Profitability Strength Rank

Threat of Rivalry Moderately Unfavorable 4.5 1

Barriers to Entry Favorable 1 2

Buyer Power Neutral 2.5 4

Supplier Power Unfavorable 5 3

Threat of Substitutes Moderately Favorable 2 6

Role of Complements Moderately Unfavorable 4 5

Overall Industry Attractiveness

MODERATELY UNFAVORABLE

4 N/A

DRAM firms face unfavorable forces through intense rivalry and threats from both supplier

and complement groups. The incumbents continuously battle for high volume sales needed

to generate the cash flow to fund an intense technology race. Further exacerbating this

rivalry, from the equipment supplier side, is the low percentage (11.6%) of semiconductor

equipment purchased by the DRAM industry as compared to other semiconductor

industries, leading to longer equipment lead times and higher capital costs.

Fixed costs and lead times required for most firms to enter the DRAM industry are high and

contain significant long-term market risk. In addition, many firms that create

complementary products (e.g. CPUs) arguably possess know-how and semiconductor

equipment required to move into the DRAM space. Given the higher profits obtained from

these other products, it is clear that these firms are choosing to stay out of DRAM unless

market conditions are to improve. DRAM firms have been able to improve traditionally low

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switching costs in three (mobile, server, specialty memory) of the four buyer groups

through differentiating features or product strategies.

II. C. Macro Environmental Forces Analysis, Economic Trends and Ethical

Concerns

II. C1. Global

The Great IT Demand Shift

Year 2011 was noted as the first year where mobile device shipments (552M) exceeded

that of notebooks and PCs (365M), as identified in Exhibit 5. This cross-over point has

been labeled “The Great IT Shift” noting a paradigm shift as consumer values change from

high computing performance to long battery life and constant high-speed connectivity

(Nomura Equity Research, 2012). Mobile devices are expected to continue their high

growth to 1,800 million units in 2014 as compared to 600 million units for notebooks and

PCs. DRAM production for 2012 has also accounted for this shift with computer DRAM

production dropping below 50%.

Explosion of Data Content

The advent of social networking along with tablets and smart phones is leading a sharp

increase in data traffic – from 200 EB (billion gigabytes) in 2001 to a projected 55,000 EB

in 2013. This increase has driven demand for servers and server DRAM. Exhibit 6

identifies both the growth in traffic and notable events driving increased demand, including

the advent of YouTube (2004), Facebook (2005), Android 2.0 mobile operating system

(2009), iPad (2010), and Netflix Streaming over mobile devices (2011). Overall mobile

traffic usage is growing as forecasted to a CAGR of 78% from 2011 to 2016 (CISCO, 2012).

Shift Away from PC Development

Microsoft’s Windows 8 release has disappointed the PC DRAM industry. Now centered

towards a tablet platform, the new operating system will not require an increase above the

current 2GB DRAM typically used in computers. This is a sharp contrast to the mid-1990s

and early 2000s, when each new release of Windows required increased DRAM needs in

PCs.

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II. C2. Social

Social Media

Social networks such as Facebook, Twitter and LinkedIn are training the younger

generations to be permanently online and are driving the fast growth of

gaming/video/texting-capable mobile terminals, i.e., smartphones and tablets. These

devices require increasing amounts of DRAM to support their increasingly powerful

processors, networking, and audio-visual chips. If social networking ever proves to be a

fad, the growth rate of the memory industry will be affected.

II. C3. Technological

DRAM-to-NAND Flexibility

Though it is cheaper to build a new higher-technology foundry than to refit an older one,

foundries are somewhat flexible in converting production from one product to another.

For example, responding to the NAND over-supply problems of 2012, Samsung is

converting its “Line 14” plant in Korea from 28 nm NAND to 28 nm Logic circuit

manufacturing (Lapedus, 2012). Micron’s purchase of Elpida’s DRAM fabs in Japan and

Singapore is not a pure DRAM play, since the fabs can always be converted to NAND or NOR

production, albeit with some costs and down-time.

Move Towards 450 mm (18”) Wafers

The 300 mm (12”) wafer has ramped up now in newer foundries across the globe. The

move to 450 mm wafers will be the core of planned or under-construction plants, expected

to start production in 2017, at the earliest. Intel leads the investments, followed by

GlobalFoundries and TSMC. 37% of wafers produced in 2012 are still 200 mm. This move

is expected to lower the variable costs of memory production by 30-40%. (Pajjuri, Heller, &

Goodman, 2012).

Long Lead Time

Manufacturers and designers typically plan their multi-billion dollar investments to target

economic sweet spots 2-4 years in advance. Intel, GlobalFoundries, Samsung, and TSMC

have made public 2015 plans for 14 nm process manufacturing. These plans depend on

tools and technologies still under development, with no guarantee of their fruition or final

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wafers/hour or yield/wafer results. This high-risk nature of the field has been the case for

decades and all players have got comfortable planning that far ahead.

Intel’s Dominance

Intel’s x86 CPUs are threatened by the emergence of ARM processors in mobile and tablet

devices. Tablets are cannibalizing laptops/netbooks, and increased power of the cheaper

low-power ARM processors will eventually threaten the x86 in PCs and servers. (Credit

Agricole Securities, 2012)

II. C4. Governmental/Political

Local Generosity

Semiconductor manufacturing is considered a matter of national security by many

governments across the globe. It is also a creator of mass high-paying jobs where foundries

are located. Generous tax and credit support is furnished by governments to lure

manufacturers to build their foundries locally. For example, NY State has committed more

than $1.2B in cash and tax breaks to GlobalFoundries (spin-off of AMD) to build a research

and manufacturing facility at Luther Forest Technology Campus (Kerr, 2011). Companies

typically auction their future plans to squeeze the most generous support from competing

states/regions. Hynix was bailed out by the Korean government in 2001, without serious

legal challenges from its competitors.

Need for Lobbying

Anti-trust lawsuits, anti-dumping policies, and penalties for collusion vary from one

country and government to another. The solar industry just witnessed a big win for

American manufacturers against their Chinese counterparts that were long known to be

flooding the market – aided with different forms of Chinese government subsidies – leading

to huge tariffs and shifts in the market. Similar incidents has happened in the memory

industry – Chinese dumping of DRAM in the 1980s – forcing current players to be involved

in lobbying and political campaigns, and to diversify their plant locations and suppliers.

Chinese Politics

Concentration of manufacturing in China is exposing the whole supply-chain to any

political instability in China. Foxconn, a contract manufacturer of electronics that employs

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1.2 million in China, was heavily criticized by labor groups in 2010 after several workers

jumped to their death (Lorraine, 2012). Deceleration of Chinese GDP growth to 7.8% is

adding more risk to the industry, and might potentially cost the survival of less diversified

manufacturers.

II. C5. Ethical

Environmental Pollution

Semiconductor industry is a major contributor to environmental pollution in a number of

ways. Fabrication can lead to river and soil contamination, as proved by numerous studies

(Angela Yu-Chen Lin, 2009). Old integrated circuits (ICs) are very toxic if disposed of in

landfills. The rise of solar power has accelerated the growth of silicon recycling

technologies that recover gold and other expensive and toxic elements from obsolete chips,

while using re-processed silicon for use in solar panels.

Inhumane Recycling

The silicon scrapping and recycling industry, while beneficial to the environment, is now

being scrutinized for its own dependence on “e-waste” export to poor countries like India

and Nigeria, where labor is heavily supplied by children in dangerous facilities. The West is

turning more towards local e-waste management. For instance, the “Electronic Waste

Recycling Act”, in effect in California since 2003, requires consumers to pay a recycling fee

for certain types of electronics. This added fee is redirected to qualified companies that

recycle silicon products and is becoming part of the total cost of ownership of electronics,

whether paid by the producer as cost, or by the consumer as added price (Government of

California, 2012).

Water Consumption

A foundry consumes pure water (for rinsing chemicals) corresponding to a small city of

40,000 to 50,000 inhabitants. New technologies are emerging to minimize the need for

pure water (Yan, Dhane, Vermeire, & Shadman, 2009), thus having less impact on the

environment. Technology is allowing less environmental impact for semiconductor

manufacturing, in return for slightly higher COGS. Micron and most of its competitors

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acknowledge the increasing costs to meet the environmental regulations and laws related

to health and safety.

II. C6. Macroeconomic Trends

Shaky Economic Recovery

By Q2 2012, the U.S. economy is growing at a 1.3% rate, barely recovering from the 2008

Great Recession. Europe is still unable to convince its members to forfeit their fiscal

sovereignty – a needed step before bailing out its weaker economies. Growth in China has

slowed down to 7.8% and the world is worried about another credit bubble busting in

Chinese construction loans. The world’s central bankers are running out of ammunition

after 4 years of credit easing, while governments will be forced to tighten their budgets to

avoid credit downgrading. The world economy is unstable, directly affecting the overall

demand for consumer electronics, and, consequently, the demand for DRAM products.

Made in Asia

With Asia fast becoming the world’s factory, semiconductor and electronics manufacturing

ecosystems are creating barriers to entry in other regions of the world. Supply chain Asian

dominance is exposing the market to shocks. For example, the supply of NAND Solid-State

Drives was directly affected by the flood that hit Thailand (where half of the HDD parts are

manufactured) in 2011 (Deloitte, 2012). Similarly, the Tsunami in Japan offered another

example of supply disruptions caused by concentration of suppliers in that region.

II. C7. Demographic Trends

With the fast aging of the Asian Tigers, the demographic dividend enjoyed by the current

centers of semiconductor manufacturing will run out. China’s median age is expected to

grow from 35 to 45 years by 2035. Manufacturers will find skilled labor in shorter supply,

will need to pay more taxes, and will face a less welcoming environment for import labor,

affecting the overall production cost advantage seen within this region.

II. D. Competitor Analysis

II. D1. Firm’s Competitors

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The DRAM industry has consolidated from around twenty players in the first half of the

1990s to eight players (four major and four minor) in 2012 (Nomura Equity Research,

2012). The four major companies – namely, Samsung, Hynix, Elpida, and Micron – supplied

85% of DRAM products globally in 2011, and this number expected to grow to 91% in

2012. Consequently, the market share of smaller firms keeps declining.

In 2011, Samsung’s market share was 37%, Hynix’s was 22%, Elpida’s was 18%, and

Micron’s was 9%. In 2012, Hynix and Micron are expected to increase their market share

to 27% and 11% respectively, taking market share away from the smaller players – Nanya

Technology Corp. (Nanya), Powerchip Technology Corp. (Powerchip), Winbond Electronics

Corp. (Winbond), and ProMOS Technologies (ProMOS). ProMOS is expected to exit the

DRAM market completely, Powerchip and Winbond are expected to supply less than 0.5%

of total DRAM shipments, and Nanya will keep a steady market share of 5-5.5% (Nomura

Equity Research, 2012).

II. D2. Primary Competitors

As indicated above, Samsung, Hynix, and Elpida represent the three primary competitors of

Micron in the DRAM market. All three companies and Micron itself will be included in the

analysis of competitors below.

Samsung

Samsung is a major player in two main business areas: 1) Consumer Electronics (referred

to as “Set Business”), where it develops, manufactures and sells a wide range of products,

such as smartphones, tablets, cameras, and home appliances, and 2) Semiconductors

(referred to as “Component Business”), where it develops, manufactures and sells a variety

of memory chips, logic components, and image sensors, as well as LCD products.

Samsung developed its first DRAM product in 1983, making South Korea the third country

in the world after the U.S. and Japan to produce DRAM chips. In the ten years that followed,

Samsung climbed its way up to become the leading supplier of DRAM, reaching a 14%

market share in 1994. Research shows that Samsung mastered product design and process

design at the same time, helping the company achieve shorter product life cycles and

shorter time to market. As a result, it gained higher profits by being first to market and

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improved costs faster than competitors (Woojai Kim, 2004). This capability plays to

Samsung’s benefit to this day. In 2011, Samsung’s market share in DRAM was 37%. The

company is forward integrated, which means that its semiconductors products are

components in its consumer electronics products. In that same year, 48% of the

semiconductors that were manufactured by Samsung were used in-house (Samsung,

2011).

Hynix

Hynix was founded in 1983 as “Hyundai Electronics Industries”, the electronics arm of the

Hyundai conglomerate. In 1999, it acquired LG Semicon (the semiconductor unit of LG

Group) and created a meaningful force in the memory market. In 2001, the company

disaffiliated itself from Hyundai and changed its name to Hynix Semiconductor (Hoovers,

2012). In February 2012, SK Telecom acquired a majority stake in Hynix, making it a part

of SK group and giving it a much needed injection of capital, after more than a decade of

financial woos and swings from profits to losses. Hynix develops, manufactures, and sells

memory products in the DRAM and NAND markets. It is the second largest manufacturer of

DRAM products with 22% market share in 2011, a share that is expected to grow to 27% in

2012 (Nomura Equity Research, 2012).

Elpida

Elpida was founded in 1999 by combining the DRAM units of electronics giants NEC and

Hitachi. In 2003, Elpida acquired the DRAM operations from Mitsubishi Electric Corp. The

firm specializes in the manufacturing of DRAM products and, as of 2011, holds 18% market

share, only behind Samsung and Hynix (Nomura Equity Research, 2012). Elpida is known

for its advanced process engineering capabilities, which has allowed the company to skip

technology generations from 60nm DRAM to 40nm and to spearhead the move to 30nm

DRAM. However, the combination of volatile DRAM prices, lack of product diversity, and

huge R&D and capital investments brought the company to declare bankruptcy in February

2012.

Micron

Micron was established in 1978 in Boise, Idaho. It started as a semiconductor design firm,

later adding a manufacturing capability with funding from local potato farmers and

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McDonald’s. In the 1980s, when Japanese manufacturers were dumping chips on the U.S. to

gain market share, Micron filed an antidumping petition, which resulted in the

Semiconductor Trade Agreement between the U.S. and Japan.

Micron expanded its operations by acquiring the DRAM business from Texas Instruments,

in 1998, and Toshiba, in 2002. Still in 2002, Micron tried to acquire then ailing Hynix, but

the deal was not approved by Hynix’s directors. Over the years, Micron has made a few

attempts to diversify its portfolio – it had a PC business from 1995 to 2001, it had a flat

panel display division for a few years, and it developed and manufactured CMOS image

sensors with the acquisition of Photobit. Micron spun-off the imaging business in 2008. All

those years, however, memory products remained as a core business (Hoover's, 2012). In

2006, Micron diversified its memory offerings by entering into a joint venture with Intel to

develop NAND flash memory. Numonyx’s acquisition in 2010 added NOR to the portfolio.

Micron is the fourth largest DRAM supplier, with a market share of 9% in 2011. This share

is expected to grow to 11% in 2012 (Nomura Equity Research, 2012). DRAM was Micron’s

best selling product for many years. In 2012, for the first time, NAND sales outpaced DRAM

sales (Micron, 2012).

II. D3. Primary Competitors’ Business Level and Corporate Level

Strategies

Corporate Level Strategy

The corporate level strategy of each firm was determined based on an analysis of the level

of granularity observed in the memory market. It was concluded that, although DRAM

products can belong to different segments, they are often grouped under a single business

unit.

Samsung: Samsung breaks down its revenue by product-based operating segments which

include Digital Media, Telecommunication, Semiconductor, and LCD. In 2011, Digital Media

accounted for 35% of the revenue, Telecommunications for 30%, Semiconductor for 19%

and LCD for 16%. No further breakdown within the semiconductor segment was available.

In Samung’s 2011 annual report, the CEO stated that the company has “maintained strong

synergy between our set and component business areas” (Samsung, 2011). Samsung,

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therefore, can be classified as a related constrained corporation under Rumelt’s

classification.

Hynix: In Q2 and Q3-2012, DRAM sales represented 75% and 70% of Hynix’s revenue,

respectively. The other 25% and 20% came mostly from NAND sales (SK Hynix, 2012).

This makes Hynix a dominant DRAM business according to Rumelt’s classification.

However, growing demand for NAND may change the mix and make it a related

constrained corporation.

Elpida: Elpida is a DRAM-only company; hence, it is classified as a dominant business.

Micron: Micron supplies all types of memory, namely DRAM, NAND, and NOR. With DRAM

representing 39% of sales in 2012, NAND with 44% and NOR with 12%, Micron qualifies to

the definition of a related constrained corporation.

Business Level Strategy

The business level strategy of the DRAM business of each competitor was determined

based on the characteristics of the different DRAM products, which were combined under

four segments:

1) PC/Notebook DRAM: DRAM chips used in PCs and notebooks are considered

commoditized. Any PC manufacturer can buy PC DRAM from any DRAM supplier and there

will be no apparent difference in quality, operational and technical specifications.

2) Mobile DRAM: Smartphone and tablet companies (such as Apple and Motorola) require

that the DRAM used in their devices will be smaller in size and will consume less power

than PC DRAM. A DRAM firm that wishes to supply mobile DRAM must be able to comply

with different power requirements from different customers.

3) Server DRAM: Server companies (such as HP and IBM) require higher quality standards

and have strict technical requirements regarding operating temperature range and speed.

However, there is no differentiation among server DRAM products.

4) Specialty DRAM: A bucket category that describes multiple uses of DRAM such as in

consumer electronics and appliances, automotive applications, and medical applications.

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Another important factor in the analysis is that DRAM prices are determined by market

forces, and a single supplier has no power of price differentiation. On top of that, a

company that achieves economies of scale will not typically transfer the cost reduction to

the DRAM buyer, as this will erode its margins very quickly given that prices are in

constant decline.

In light of the above segmentation and pricing scheme, it was concluded that all DRAM

companies are employing a differentiation strategy (as opposed to low cost) according to

Porter’s generic business level strategies. In addition, all firms have characteristics of

broad differentiation in the PC DRAM business, and of focused differentiation in the other

DRAM segments. Because no single company supplies only one type of DRAM, all

competitors employ a hybrid business level strategy.

II. D4. How Competitors Achieve their Strategic Position

Exhibit 7 presents a complete VRIO analysis of the four players. Following are the main

findings from the analysis.

Samsung

Since 1994, Samsung has been the global leading supplier of DRAM products. Samsung’s

sustainable leadership stems from two primary factors: 1) a positive feedback loop, from

earnings to R&D to sales and back to earnings, and 2) vertical integration.

Positive Feedback Loop: Samsung entered the semiconductor business in the early 1980s

when it injected $100 million into developing its first DRAM product. It then acquired

technology from outside the company, and embarked on a rapid learning process that

resulted in outstanding product design and process design capabilities, and, ultimately,

leading to advanced, high-quality DRAM products (Woojai Kim, 2004). This learning

capability, driven by injections of capital, is what keeps the company’s leadership position

to this day. In the last twenty years, Samsung has consistently been the first DRAM

company to invest in the next technology node. This fact enables Samsung not only to be

the first to market with the new technology, but also to achieve production efficiencies and

improved yields before its competitors. As a result, Samsung has enjoyed higher margins

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than competitors and greater profitability. Those profits are then invested back in R&D and

capital expenditures, and the positive feedback loop continues.

Vertical Integration: Overall, semiconductor companies (including DRAM companies) face a

multidimensional capacity planning problem. In the short term, they have to decide their

DRAM product mix, i.e., how many wafers to manufacture for each DRAM type. In the

medium term, they have to assume how much will be produced from their young,

immature, and low yields emerging DRAM lines. In the long term, they have to decide

whether or not to start investing in the next technology node and which node it will be,

knowing that the cost to construct a new fab is more than $6B dollars and that it takes two

years for the fab to be fully functional. All these decisions have to be made in a highly

uncertain and volatile environment. Vertical integration gives Samsung an edge over other

competitors by making known some of the unknown – information about demand, future

market requirements, and product mix is readily available from in-house customers.

Because those internal customers are leaders in their respective markets, Samsung is on

the right track to keep its technological leadership.

Hynix

Hynix is the second largest manufacturer of DRAM products, but in recent years it was not

profitable. The company experienced profitability and liquidity problems in the past and

was bailed out by the Korean government in 2001. Recently, in a strategic move that seems

to bear fruit, Hynix focused its marketing and sales efforts on Chinese smartphone makers,

which Hynix predicts will account for 33% of global smartphone shipments in Q4-2013 (SK

Hynix, 2012). However, our VRIO analysis shows that Hynix does not currently hold a

sustainable competitive advantage.

Elpida

Elpida continues a long standing Japanese tradition of delivering high quality products to

customers. The company has a strong presence in the mobile DRAM space, with a

reputation for its low power chips and innovative packaging solutions (GlobalData, 2012).

Elpida’s contract to supply Apple with DRAM for the iPhone and iPad is considered highly

valuable. However, none of its resources and capabilities provides the company with a

sustainable competitive advantage.

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Micron

Micron was able to survive in the DRAM market through acquisitions and strategic

alliances that allowed it to diversify within the memory market and enhance its

technological capabilities. Currently, however, Micron is at a disadvantage compared to its

competitors in the mobile DRAM space, mainly because it did not upgrade its technology to

be on par with new mobile requirements. Ironically, Micron’s sustainable competitive

advantage comes from its older technology fabs. Having kept the facilities and the know-

how to support older products, Micron is now offering a “Product Longevity Program”, in

which it guarantees to make products available for at least ten years. This value

proposition is appealing to many customers in the automotive, industrial, medical, and

aerospace industries. The Product Longevity Program is part of Micron’s focus on specialty

DRAM, which carries higher margins.

II. D5. Value Minus Cost Analysis

Value

Exhibit 8 shows a list of value drivers by segment and assigns scores to the primary players

across all the drivers for each segment. A summary of this analysis is provided below.

PC DRAM: As noted before, PC DRAM is commoditized and, as a result, all firms received

similar value scores.

Mobile DRAM: In mobile DRAM, important value drivers include power, size, as well as

guaranteed supply, given the high growth rate this industry is experiencing. In this

segment, Elpida provides the highest value among competitors due to its strong reputation

for supplying low power, high quality DRAM products. One of Elpida’s most coveted assets

is its relationship with Apple, while its lacking capability is in bundling. Many mobile

manufacturers are starting to use packages that bundle DRAM and NAND. Elpida does not

have a NAND operation, hence is not able to bundle. Micron scored low on mobile because

it is on an older technological node than its competitors, and is not able to meet the power

and speed requirements of mobile customers. Samsung and Hynix received similar value

scores. The fact that Samsung is forward integrated is affecting its score on guaranteed

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capacity, under the assumption that its in-house needs will get higher priority over other

customers in times of shortage.

Server DRAM: Micron has only two competitors in the server DRAM space, since Elpida

does not have an offering of this product. Samsung and Hynix both scored about 20%

lower than Micron on their server DRAM capabilities, a segment which puts emphasis on

DRAM’s speed and latency, but is less concerned about the size and power consumption.

Micron has gained reputation in the server space by providing a special low-latency DRAM

chip, and so far has developed good relationships with important customers, such as HP

and IBM (Employee1, 2012) (Employee1, 2012).

Specialty: All of Micron’s competitors scored 50% lower on specialty DRAM. A few years

ago, Micron made a strategic decision to go after the smaller, but higher margin segment of

specialty DRAM. This segment is comprised of customers with a unique requirement: to

keep product life cycles longer than those typical of PC or mobile applications. For

example, a DRAM used in a car computer can last ten years before the car company changes

the design of its computer. Micron has developed the capability to answer this specific

need, focusing primarily on automotive and industrial applications, as well as consumer

electronics.

Price

DRAM ASPs are in constant decline. Specifically, between 2007 and 2008 prices took a dive

because of oversupply in the market, and then continued to decrease because of the

economic crisis. From about $10/GB in the beginning of 2007 (Nomura Equity Research,

2011), ASPs of PC/Notebook DRAM reached $0.9/GB in 2012 (Nomura Equity Research,

2012).

DRAM prices in all segments are determined by the market, which implies that all DRAM

firms sell their products for the same prices, whether it is by contract or by occasional

sales. The differentiation in prices comes from the segmentation according to the DRAM

usage. PC/Notebook DRAM carry the lowest price. Mobile DRAM enjoys a 2.5x multiplier

above PC DRAM, Server DRAM enjoys a premium of 2x, and specialty DRAM carries a

premium of 1.5x.

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Cost

The prohibitively high fixed costs that are required to build a fab were discussed in Section

II B – Six Forces Analysis. For the Value Minus Cost analysis, only variable costs were

considered. These costs are largely dependent on the technological node the company has

achieved. Historically, each new technology node, named after the line width that the

lithography process was able to achieve, such as 60nm or 40nm, enabled doubling the

number of transistors on a wafer. This resulted in reduced cost per transistor. The cost

reduction was not reduced to half because of low initial yields. As the manufacturer

increased its yields, margins improved.

To determine the cost for each competitor, the node each one achieved for each of the

DRAM segments was taken into account. The findings are summarized in Exhibit 9.

Samsung enjoys a cost advantage in almost all segments due to its ability to jump to the

next node before its competitors. Micron and Hynix, both on older technology nodes, suffer

currently from a cost disadvantage. Elpida has already achieved the 2x nm technology, but

its production mix in 2011 was mostly PC DRAM, for which margins are close to zero.

Summary of Value Minus Cost Analysis

Because prices are the same for all competitors in all DRAM segments, advantages or

disadvantages originate from the value that the company is capable of delivering to

customers, as well as from costs. Following is a summary of each competitor’s position in

the V-C framework.

Samsung: Samsung enjoys cost advantages across the board and is the only company that

turns a profit even in the low periods of the DRAM cycle. Samsung delivers comparable

value to Hynix in the mobile and server DRAM. Overall, Samsung’s power comes from its

ability to 1) be the first to market with new nodes, 2) ramp up production quickly, 3)

improve quality faster than competitors, and 4) enjoy the higher margins that follow.

Hynix: Hynix is at a cost disadvantage in the mobile and server DRAM. To stay competitive,

it will have to catch up with the other competitors. However, Hynix delivers comparable

values in PC/Notebook, mobile, and server DRAM.

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Elpida: Elpida enjoys a cost advantage over Micron and Hynix in the PC/Notebook, mobile,

and specialty DRAM segments. It has a slight value advantage in the mobile DRAM.

Micron: Micron is at a cost disadvantage compared to Elpida and Samsung in the mobile

and specialty DRAM. However, it delivers more value than competitors in the server and

specialty segments. Micron is behind its competitors in the lucrative mobile DRAM

segment. To stay competitive, it will have to catch up.

II. D6. Comparative Financial Analysis

Exhibit 10 provides the financial ratios for the four firms under analysis. The financials

ratios are not specific to the DRAM market; instead, they reflect the overall company’s

business. For example, Samsung is well diversified and the financials include data for all of

its divisions. Samsung and Hynix have their fiscal year ending in December while Micron’s

fiscal year ends in September and Elpida’s ends in March. No financial data for Elpida was

available after its 2011 annual report, so the comparative analysis does not include 2012.

Based on the financial analysis, Samsung is in the best financial position, followed by

Micron, Hynix and Elpida in that order.

Profitability

Samsung has the best profitability among the competitors. It has a consistently high gross

margin and is the only competitor that earned a profit in each of the past five years. Its

strong performance is attributed to the diversified corporate portfolio, where profits in

other business units cover for losses in the semiconductor business. Elpida presented the

worst profitability. In 2008 and 2011, its gross margin was negative and it suffered heavy

losses. Micron and Hynix both presented uneven performance, but, in 2011, Micron was

more profitable than Hynix.

Liquidity

Micron has the best liquidity ratios in the industry, thanks to low levels of current liabilities

achieved by maintaining a high level of cash & equivalents, and a 60 days turnover on

accounts receivable. Samsung is also in a healthy position in respect to its current

liabilities. Elpida’s liquidity worsened significantly in the year leading to its bankruptcy.

Hynix’s liquidity improved from its 2008 low. Samsung has a large cash position of about

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$12.7B at the end of 2011. Hynix has the lowest levels of cash among the competitors.

Surprisingly, Elpida had a cash reserve of $1.17B at the time it filed for bankruptcy.

Leverage

Samsung has the lowest leverage in the industry. Its debt to equity ratio was at 0.53 for

2011. Micron’s debt to equity ratio shows a well-balanced leverage. Hynix has a much

higher leverage than Micron. Elpida, which used debt to finance its capital investments,

had the highest debt to equity ratio. Elpida’s high debt levels brought it to file for

bankruptcy with $5.6B in liabilities. This was the largest ever bankruptcy by a Japanese

manufacturer (Reuters, 2012).

Efficiency

Micron is the least efficient competitor. Its inventory turnover indicates the highest

inventory levels and its days sales outstanding indicate that its customers consistently get

60 days payment terms. Elpida’s payment collection is slightly better than Micron’s in most

years. Hynix was able to outperform Samsung in some years in its turnover and DSO ratios.

Capital Expenditures

Competitors in the DRAM market watch each other carefully for evidence of increased

capital expenditure, as those expenditures indicate a strategic move into newer technology

nodes. For this reason, some companies do not disclose capital expenditures in their

financial reports, so this analysis was completed based on data from other sources.

What stands out in the comparison of the competitors is that, during the years of the

downturn (2008 and 2009), Elpida significantly increased its capital expenditures, while

other competitors contracted. Because revenues in these years were low, Elpida had to

finance its expenditures with debt instruments, which eventually brought it to bankruptcy

in the beginning of 2012.

Another interesting fact is that none of the competitors ramped up its capital expenditures

to levels comparable to 2007 levels. That year all competitors increased their capacity,

which led to oversupply and even faster erosion of prices.

II. D7. Implications of Competitor Analysis

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In the current competitive dynamics, Hynix, Elpida, and Micron are all playing catch-up to

Samsung, which is the strongest player in the market in all aspects – market share,

technological capabilities, and financial position. However, the technological gaps are

expected to shrink in the medium range of 2-3 years, because the equipment required to go

up to the next node is not mature enough yet (see Section II E4 – Competitive Dynamics

below). This can give all players an opportunity to level the playing field, given that they

make the required investments.

Elpida’s bankruptcy creates expectations for further industry consolidation. This can

contribute to less oversupply and more stable prices, a fact that will help the remaining

companies strengthen their position.

Differentiation in this market is very challenging and all the players are trying to find

niches where they can add value, like Micron in Specialty DRAM, and Hynix in the Chinese

mobile market. Those positions, however, are fragile, and may not add significantly to the

company’s economic contribution, so all players have to be able to also supply the mass

market.

II. E. Intra-Industry Analysis

II. E1. Industry Evolution and Formation of Strategic Groups

DRAM’s original growth was fostered by investments from the U.S. defense industry and

cold war efforts. From the 1970s until the early ‘80s, the DRAM industry was dominated by

Intel, Micron, and seven other U.S. firms. Japanese firms later entered in the late 1980s and

early 1990s, outcompeting the U.S. firms with better patterns of investments and a close

relationship with their consumer customers in Japan. The majority of the U.S. firms were

forced to leave with only Texas Instruments (TI) and Micron remaining.

Through the 1980s and 1990s, the main source of DRAM was derived from the PC market

and closely followed changes in PC sales. While the market showed an average $7B in sales

in the early 1990s, it grew to an average $25B in the second half of the 1990s with two

peaks in 1995 ($42B) and 2000 ($32B) driven by new releases of the Windows operating

system which required increased computer DRAM and drove PC upgrades.

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Korean memory firms successfully captured the peak of this boom in 1995, earning a total

of $5B more than total earned by other firms listed on the Korean Exchange at the time.

These firms had aggressively entered into the market in the early 1990s, hiring American-

trained Korean engineers and investing heavily during the Japanese economic downturn.

Samsung licensed Micron’s DRAM IP and invested $1.2B to build their first fabrication

facilities (Mark & Ma, 2002). With a leading edge fabrication facility costing $500M to

build, Samsung’s heavy investment helped it to quickly build a large share of capacity

(Credit Agricole Securities, 2012).

This success in the 1990s also led other Taiwanese firms, such as Nanya, Powerchip and

Winbond, to enter the DRAM market, maintaining a total of 24 firms and offsetting the loss

of U.S. firms exiting the industry. The entrance of these new firms grew DRAM supply to

exceed demand leading to high levels of inventory and oversupply when the market

crashed in 2001 (Mark & Ma, 2002).

From the mid to late 1990s, the cost of competitive DRAM facilities jumped from $500M to

over $2B, while the TAM stayed on average at $25B since year 2000. The higher costs led

to consolidations in the industry including Micron acquiring TI in 2001 (Mark & Ma, 2002).

The exit in DRAM firms has notably been correlated to Samsung’s rising market share

(Chung, Yamasaki, Ho, Marcello, & Hiraga, 2012).

II. E2. Strategic Industry Groups

DRAM-Only Firms

The DRAM-only strategic group includes Elpida, Inotera, and Nanya. These firms have less

cash flow and decided to best achieve economies of scale by focusing primarily on DRAM.

They are more dependent on developing competitive and high-ASP DRAM products.

Currently, only Elpida has achieved this position with a competitive 32nm mobile DRAM

product where as Inotera and Nanya are one to two generations behind in technology

development.

Diversified Semiconductor Suppliers

This group began to emerge in 2004 with Micron, Hynix, and Samsung presenting their first

NAND flash products. Their portfolios now include two or more of the following: NAND

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flash, NOR flash, CMOS image sensors, logic design, or end consumer products. The

increased diversity in product portfolios can enable a more stable operating margin. Cash

flow can also be generated from other semiconductor operations to pursue DRAM process

development and capital investments. This strategic group can also utilize MCP solutions

to sell bundled solutions (e.g. Micron’s Memory Cube), increasing both customer value and

resulting ASP.

Forward Integrated Suppliers

The group is comprised of a single firm – Samsung – that has forward integrated into

numerous consumer products including smartphones, tablets, and laptops. Samsung is

able to closely align its DRAM development, including product and capacity planning, with

its consumer products. Similar to the “Diversified Semiconductor Group”, operational cash

flow generated from other business units can be invested into DRAM capital investment

and R&D spending.

II. E3. Mobility Barriers, Threats and Opportunities

Mobility Barriers

DRAM-Only and Diversified Semiconductor Supplier: The high cost of R&D and capital

spending is a barrier for DRAM-Only suppliers to expand their semiconductor portfolio into

other products, such as NAND flash or CMOS image sensors. Micron had successfully

gained a competitive standing in NAND through a co-development agreement with Intel

starting in 2006. Micron’s shared cost for this arrangement was $1.4B which is still

significant for cash-poor members of the DRAM Only group (Micron, 2012).

Moving into the “Forward Integrated Supplier” Group: Recent buyer sentiment has shown

that Samsung’s forward integration has hurt its relationship within the mobile and server

buyer groups. For example, Apple has recently announced that it is cutting back Samsung’s

share in its product line after a recent copyright trial (Ilbo, 2012). Apple’s share of the

mobile market in 2011 was 93.2 million iPhones (6% share) and 40 million iPads (62%

share). Buyers in the server market have also expressed their hesitation to work with

Samsung for fear that any collaboration weakens Samsung’s barrier to entry into server

products. Samsung’s forward integration therefore requires it not only to have cost-

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competitive DRAM products, but also to maintain competitive smart phone and tablet

offerings to overcome lost revenue opportunities (Vilches, 2012; Alexander, 2012).

Threats

ASP Volatility in PC and Mobile Market: Vendors in the DRAM-Only group are more

sensitive to falling PC DRAM ASPs. Both Nanya and Inotera posted a 90% loss in gross

margins due to DRAM demands. They have also had higher fixed costs due to producing

DRAM on older technology nodes.

Inventory shifts in DRAM supply may buoy PC DRAM ASPs, as firms in the Diversified

Semiconductor Suppliers group (Hynix and Micron) shift their production away from PC

DRAM. The increased mobile DRAM supply of 9% in 2011 to 15% in 2012 of total supply

may erode the 2-3x ASP premium commanded for this product (Nomura Equity Research,

2012).

II. E4. Competitive Dynamics

Cross-Licensing Agreements for All Strategic Groups: Micron received a net $160M from

cross-licensing agreements with Samsung during the 2012FY, with as much as $115M

attributed to DRAM intellectual property. Large firms within all buying groups are thought

to demand dual-sourcing for all components forcing memory firms to license any product

differentiator before that product is brought to market (MarketLine, 2012).

Technology Migration: Extreme Ultraviolet Lithography (EUV) equipment is expected to

delay a move to the 15nm node. (Trendforce, 2012) This delay is expected to allow

members of the Diversified Semiconductor Suppliers group (Micron, Hynix) to catch up to

Samsung in 2013 and 2014, narrowing Samsung’s cost-advantage. For example, while

Hynix’s cost per gigabyte was 16% higher than that of Samsungs in 2011, this gap is

expected to narrow to 3% in 2012 and forecasted to reach parity in 2013. This opportunity

may be short-lived as Samsung is heavily investing in EUV equipment. This threat greatly

affects the cash poor DRAM-Only segment that would face a 56% cost disadvantage if they

remain at the 32nm node, and a 26% disadvantage at the 22nm node when Samsung ramps

to a 15nm DRAM process.

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The fixed cost required to build a 22nm facility is $6B, while a 15nm facility is expected to

be much higher. The high technology cost and increased price competitiveness may force

DRAM firms in both DRAM-Only and Diversified Semiconductor Products to leave the

market (Pajjuri, Heller, & Goodman, 2012).

II. E5. Firm’s Competitive Position

The “Great IT Shift” is changing DRAM needs from PC to the server and mobile DRAM

markets. Both smartphones and tablets are expected to exceed those of PCs and laptops by

500% in 2015, shifting DRAM demand from commodity to more specialized low power

mobile and highly reliable server components.

Micron’s Competitive Position

Micron has done well to gain share in the server DRAM space, but it lacks the technology

node and supply to cater the mobile market. Failing to enter the mobile DRAM market now

may lead to Hynix and Samsung forming a duopoly, which will lead to stronger, future

barriers to entry. Additionally, increased mobile DRAM demand is expected to cannibalize

demand in the PC market thus reducing Micron’s achievable market share. To enter the

mobile DRAM segment and remain competitive in the server segment, Micron will need to

develop an attractive mobile DRAM offering that would include greater capacity and to

move from its 48nm to a lower-power and cost competitive 32nm or below technology

node.

Elpida’s Competitive Position

Elpida has attempted to ride the paradigm IT spending shift from PCs to mobile devices. It

has developed a valued mobile DRAM product, but its capacity is still too heavily weighted

in the commodity PC DRAM space. With 17% overall share in the DRAM market Elpida will

also struggle to expand into both the higher ASP mobile and server segments unless it can

further expand its DRAM capacity.

Micron & Elpida

Micron’s acquisition of Elpida will enable Micron to compete in the growing mobile and

server markets, placing it into second place to Samsung in DRAM production capacity.

Having not forward integrated, the Micron/Elpida merger will appear to be a more

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guaranteed offering of DRAM supply. With a more complete portfolio, Micron/Elpida will

be able to compete in both segments and offer bundled solutions using Elpida’s DRAM and

Micron’s NAND flash products.

II. F. Threats and Opportunities Analysis

Litigation

DRAM firms have increasingly faced lawsuits on patent infringement and price

manipulation. Patent litigation has primarily come from patent holding firms. These

litigations can significantly damage firms’ reputation, and represent a financial burden that

will adversely affect their bottom line (MarketLine, 2012).

Liquidity Crisis

With volatility in DRAM pricing affecting operational cash flow, these firms are increasingly

dependent on debt financing to continue their technology investments. The threat of

default within the European Union may freeze these firms access to credit.

Chinese Semiconductor Firms

The three DRAM strategic groups face the threat of Chinese firms entering this industry.

China’s manufacturing industry has grown due to favorable manufacturing conditions: low

labor costs, government support, and easy access to capital. This growth has been

dampened from rising labor costs (due to inflation) and concerns over product quality.

While China faces barriers to entry such as those described in Exhibit 2, it is considered

possible for Chinese firms to acquire both the required know-how and to eventually catch

up to the fast-paced DRAM industry (Park, 2012).

II. G. Summary of External Analysis

Overall, the DRAM industry has evolved into a mature industry with increased

consolidation and favorable barriers to entry for incumbents. All firms within the industry

compete to achieve higher volume sales based on increasingly lower cost DRAM products,

in order to fuel expensive technology investments that will result in future cost leadership.

This intense re-enforcing feedback loop has pushed numerous firms to leave the industry

and has incentivized incumbents to oversupply the market even further reducing profits.

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Elpida and other firms within the “DRAM Only” strategic groups are especially vulnerable

to volatility of DRAM ASPs, since it is their sole source of operational cash flow.

Recent social trends such as social networking and mobile computing have shifted buyer

power more favorably towards DRAM firms. These trends have shifted DRAM demand

more evenly towards mobile (low-power) and server (high reliability) components,

reducing commodity PC DRAM to close to a 40% market share. This has resulted in firms

shifting towards a more favorable product mix emphasizing these segments which demand

a higher price premium.

Micron and other firms within the “Multiple Semiconductor Product” groups have also

increased their market value by building NAND flash that can be bundled with mobile

DRAM. Through Elpida’s merger, Micron will be positioned with a competitive portfolio

with strengths in higher premium mobile, server, and specialty segments. It will also

control over 25% of the total DRAM market capacity.

III. INTERNAL ANALYSIS

PART 1 – MICRON

III. A. Business Definition/Mission

Micron’s mission statement was best described by the CEO Mark Durcan in the press

release announcing Elpida’s acquisition: “We are creating the industry leading pure-play

memory company” (Micron, 2012). Micron strives to be the leader in memory products by

serving all memory needs of every customer. Micron’s strategic decisions and actions in

recent years confirm this statement. Unlike Samsung, Micron is not forward integrated, so

all of Micron’s capacity is available to its customers. It has also not diversified into other

semiconductor products, so all its efforts are geared towards improving its memory

products.

III. B. Management Style

Much of Micron’s organizational culture can be explained by its location in Boise, Idaho. In

its early days, Micron was a shoestring operation, funded by potato farmers and

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McDonald’s. Neither did it have the support of experienced venture capitalists, nor an

abundance of skilled workers to choose from, but it enjoyed lower costs for land, rent, and

labor. To this day, Micron is able to retain employees for long periods of time, due to lack

of competition from other semiconductor companies in the nearby vicinity. As an example,

17 out of 31 company executives have worked for Micron for 13 years or longer, and many

of them started at entry level positions in engineering or operations (Micron, 2012).

From interviews with employees (Employee1, 2012; Employee2, 2012) and reviews on

Glassdoor.com, Micron’s management style is highly centralized and dictated top-down

from the headquarters in Boise. The company is described by many reviewers as

conservative and reluctant to change. The culture is described as a “Good Ol’ Boys” type,

meaning that top and middle management have formed a close-knit group, making it hard

for outsiders to break into. In large part, promotions also depend on each individual’s

connections to that group of managers.

In general, reviewers on Glassdoor.com find the compensation package fair and

competitive relative to alternatives in the area. Micron also pays for employees’ schooling

and higher education, and matches 401K contributions. Manufacturing personnel work in

shifts of 12 hours for 3 or 4 days a week, alternating weeks and day/night schedules.

Employees are compensated for both night shifts and over time.

Engineers who posted reviews on Glassdoor.com report higher satisfaction levels than

technicians, and describe Micron as a good company to start a career in and to gain

valuable experience. However, many others advise against staying long due to a lack of

clear career path and crippling office politics.

III. C. Organization Structure, Controls and Values

III. C1. Organizational Structure

Starting from Q2-2011, Micron has been organized in four main business units (BUs): 1)

DRAM Solutions Group – a DRAM only business unit that sells to customers in

PC/notebook, consumer electronics, server, and networking; 2) NAND Solutions Group – a

NAND only business unit that sells to customers in data storage, portable music players,

and handles IMFT (see partnerships section below); 3) Embedded Solutions Group – sells

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DRAM, NAND and NOR to customers in automotive, industrial, consumer electronics,

server, and networking; 4) Wireless Solutions Group – sells DRAM, NAND, and NOR to

customers in the mobile space (Micron, 2011). This structure is a partial separation from

the previous structure that was guided only by product line. The four BUs report to the

president, and each has its own sales and marketing team (Employee2, 2012).

Micron’s structure is a hybrid between the business oriented structure that was described

above and geographical/functional structure. There are two country managers, one in

Italy, following the acquisition of Numonyx, and one in Singapore, following the joint

venture with Intel. Functional areas such as human resources, legal, finance, and IT report

to the CEO.

As of August 2012, Micron had approximately 27,400 employees, of which 16,000 were

abroad, including 7,800 in Singapore, 3,400 in Italy, 2,200 in China, 1,100 in Israel and

1,000 in Malaysia (Micron, 2012).

III. C2. Organizational Controls

Micron’s board of directors is comprised of five independent directors and Micron’s CEO,

Mark Durcan. The board has appointed three committees to oversee corporate governance

issues: 1) The audit committee works with Micron and its independent auditors to monitor

the integrity of the company’s financial reports; 2) The governance committee nominates

and appoints board members and oversees director compensation, 3) The compensation

committee is responsible for monitoring executive compensation.

From the interview with a Senior Quality Director (Employee2, 2012), who has worked for

Micron for 29 years, we learned that performance reviews are done every six months. At

the same time, he referred to those reviews as pure formality, since it is not taken seriously

by either employees or managers. Interestingly, despite being a Quality Director, he was

not aware of quality control programs or training, although Micron’s website boasts itself

as a company widely dedicated to quality.

III. C3. Organizational Values

Innovation

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Micron refers to its engineers as “dreamers” and “visionaries” and emphasizes its

innovation capabilities (Micron, 2012). Until 2007, Micron was among the top 10 patent

recipients in the U.S., and most recently have received awards on its memory chips design.

In 2006, Micron launched Micron Ventures, an early stage equity investor in companies

whose technologies are salient to Micron’s strategic interests.

Integrity and Ethics

Micron continuously updates and reaffirms its ethics and compliance policies and practices.

Micron operates a dedicated compliance hotline where employees can anonymously report

violations of the company’s Code of Business Ethics. In addition, the Vice President of Legal

Affairs acts also as a Chief Compliance Officer. Training programs had been developed and

put in place regarding compliance and anti-bribery/corruption policies.

Environmental Policies

Micron uses lead in the manufacture of its products, but it offers lead-free or “green”

products to customers who specifically request for them. Micron’s manufacturing process

is lead-free and is able to offer “green” products to customers who ask for them. Green

products, according to Micron’s definition, adhere to standards of maximum trace amounts

of harmful materials, such as Chlorine and Bromine. Micron makes an effort to reduce its

water consumption and recycles 70-80% of the water that is used in its manufacturing

processes. An effort is also made to continuously reduce the amounts of chemicals that are

used in those processes.

Quality

Micron received its ISO 9001 certification back in 1994, and it since has been renewed

several times. Recently, the company made an effort to comply with the extended ISO

standard TS 16949, which details additional technical specifications and touches on supply

chain management, delivery standards, and environmental stewardship.

III. D. Strategic Position Definition

III. D1. Corporate Level

Business Portfolio

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Micron’s core business is in memory products, which, in 2011, accounted for 95% of

Micron’s revenue. Within the memory business, DRAM accounted for 41% of revenue,

NAND for 36%, and NOR for 18% (Micron, 2011). Recently, however, as it can be seen

from the 2012 annual report, NAND sales (44% of revenue) surpassed DRAM sales (39% of

revenue), indicating a shift in customer demand.

The other 5% of Micron’s revenue comes from the company’s holdings in Aptina Imaging,

which develops and manufactures CMOS image sensors, and from sales of photomasks,

through a joint venture with Photronics Inc. by the name of M P Mask Technology Center.

Rumelt’s Classifications

As mentioned in Section II D3 – Primary Competitors’ Business Level and Corporate Level

Strategies, Micron is a related constrained corporation. This classification is derived by

Micron’s division into business units, each carrying strong ties with one another.

Acquisitions, Mergers, and Divestments

Micron has a rich history of growth by acquisitions which began in 1998 with the

acquisition of Texas Instruments’ (TI) memory operations. The most recent DRAM related

acquisition was in 2002, when Micron acquired Toshiba’s commodity DRAM operations.

To gain insight into Micron’s acquisition strategy, we examined the two most recent

acquisitions (Displaytech in 2009, and Numonyx in 2010), even though they are not DRAM

related.

Micron acquired Displaytech in May 2009 as part of its ongoing attempts to diversify the

company’s portfolio outside the core memory business. Displaytech developed and

produced tiny projectors, referred to as “microdisplays”, which enable a smartphone to act

like a projector (BusinessWeek, 2009). An analysis of this acquisition, as shown in Exhibit

11, shows that an equity alliance would have been a better strategic choice, mostly because

of uncertain market conditions. As an affirmation to this conclusion, in August 2012,

Micron sold its microdisplay business to a subsidiary of Citizen Japan (Citizen Finetech

Miyota Co., Ltd., 2012).

In February 2010, Micron acquired Numonyx B.V., a privately held flash-type memory chips

maker that was founded in 2008 by Intel, STMicroelectronics, and Francisco Partners. The

44

goal of this acquisition was to strengthen Micron’s presence in the mobile NAND and NOR

markets. As shown in Exhibit 11, the acquisition was the right strategy, as it enabled

Micron to become a one-stop-shop for memory products (Micron, 2010).

Partnerships

Partnerships are also a key part of Micron’s strategy. On its website, the company

proclaims that “Over the years, we’ve learned that having key partnerships help make us a

better company. It’s allowed us to diversify our product portfolio, create a larger global

presence and increase our manufacturing scale” (Micron, 2012). Micron is currently

involved in four main partnerships which will be analyzed below. As in the case of the

acquisitions, the partnerships are not necessarily related to Micron’s DRAM business, but

the analysis is still beneficial for gaining insight into the company’s overall strategy.

In 2006, Intel and Micron formed a joint venture – IM Flash Technologies, LLC (IMFT) – to

produce NAND flash products for the two companies. Micron’s interest in IMFT is 51%, and

it gets an equivalent percentage of revenue. R&D costs are generally split equally between

Micron and Intel (Micron, 2011). Another NAND joint venture with Intel, IM Flash

Singapore LLP, became wholly owned after Micron acquired the remaining 14% that did

not own. As presented in Exhibit 12, this partnership is valuable for both companies.

In 2011, Micron had two DRAM joint ventures with Nanya called Inotera and MeiYa. As

part of the agreement, the companies share development costs equally. In addition, Micron

is receiving royalties from licensing technology to Nanya. Inotera accounted for 37% of

Micron’s DRAM gigabit production in Q4-2011. MeiYa was absorbed into Inotera during

2012. The analysis presented in Exhibit 12 shows that the partnership faces risks, and that

an acquisition may have been a better strategic choice.

Micron’s most successful venture into non-memory territories was with imaging

technology. Micron added CMOS image sensors to its portfolio with the acquisition of the

imaging business from Avago Technologies in 2006. Micron became the leading supplier of

CMOS image sensors and the product line accounted for 11% of the company’s sales in

2008 (Hoover's, 2012). In March 2008, Micron spun-off its imaging business as an

independent entity under the name “Aptina”, and, in June 2009, it sold a majority interest

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of 65% to Riverwood Capital and TPG Capital, turning Aptina into a privately held

company. Micron retained the remaining equity share of 35%. Micron’s then CEO, Steve

Appleton, described the spin-off as a move that will allow each company to focus on its

respective core business.

Portfolio Analysis using the BCG Matrix

As illustrated in Exhibit 13, the company does not have a cash cow that it can count on for

the near or medium future. Because of fluctuations in demand and in selling prices, DRAM

(Micron’s flagship product until recently) was never a typical cash cow, as it could not rely

on it to deliver consistent good performance. Currently, NAND has the best prospects of

market growth, but it shares the same characteristics of uncertain demand and prices. In

NOR, Micron is losing market share to one of its competitors, Spanion (iSuppli, 2012).

Demand in this segment is also highly uncertain, and substitutes already exist. It is

apparent from this analysis that Micron’s portfolio is risky and carries a lot of uncertainty

with it; however, this is the nature of the industry that Micron plays in.

III. D2. Business Level

As explained in Section II D3 - Primary Competitors’ Business Level and Corporate Level

Strategies, Micron implements a hybrid business strategy by catering to mass market needs

with PC/Notebook DRAM, as well as to more specialized applications of DRAM, such as

server, automotive, and medical.

III. D3. Resources & Capability Level

Micron’s Value Chain (see Exhibit 14) supports the classification of Micron’s business level

strategy as a hybrid differentiation strategy. This is apparent by the existence of multiple

value creating and cost reducing drivers. The analysis also reveals that many of those

drivers are generic to the industry, with only a few that are truly unique to Micron, such as

the longevity and resell programs. This is typical for an industry that went through a

process of commoditization over the years. For a deeper look into Micron’s value and cost

drivers, refer to Section II D4 – How Competitors Achieve their Strategic Position, and for

its V-C analysis, see Section II D5 – Value Minus Cost Analysis.

III. E. Financial Analysis

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Performance and Operating Ratios

In 2012, Micron reported revenue of $8.23 billion, a decrease of 6% from 2011. Sales were

attributed to the company’s following products: 44% to NAND flash (8% increase from the

previous year), 39% to DRAM (2% decrease from the previous year), 12% to NOR flash

(6% decrease from the previous year), and 5% to other (unchanged from previous year).

With the exception of 2009, revenue growth has shown consistent improvement in the past

five years attesting to the appeal of Micron’s products in the memory market. However, the

company’s weak financial performance is evidenced by a steady decrease in net income in

the last three years. Based on Micron’s most recent 10-K, operating margins have

weakened. Despite stronger margins in 2010 (~19%), margins have since then been

squeezed to 8.6% in 2011 and exceeded -7 % in 2012. This sharp decline could be

associated with inefficient cost management. Similarly, net income has dropped from

$1.85B in 2010 to $167M in 2011, and a loss of $1B was reported for 2012.

Although the entire industry has been struggling to remain profitable in a context of a slow

economic recovery and rapidly falling prices of DRAM and NAND flash memory, Micron’s

profitability indicators have consistently remained below industry averages as observed in

Exhibit 21. However, Micron stands out from competitors in terms of R&D and capital

expenditures, which indicates a commitment to develop advanced products and processes

in order to maintain or improve its market position. In 2012, R&D and CapEx amounted to

$1.69B and $618M, respectively. Exhibit 22 shows that Micron steadily maintained its

industry lead in both domains with the exception of 2009 and 2010, when CapEx levels

were slightly lower than industry. As of August 2012, Micron holds $14.32B in total assets,

of which $2.4B are in cash, $1.28B in receivables, and $1.81B in inventory. Liabilities seem

well controlled and amount to $5.9B as of the same date. Micron has a 5 year average

current ratio of 2.28 and, therefore, is in a strong position to meet its short-term

obligations even if a slight decrease from 2011 is observed. Overall, both debt and capital

remain at a reasonable level. The large cash balance and limited interest burden allow the

company to face the volatility of the industry with moderate strength.

Valuation

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The Discounted Cash Flow (DCF) model yielded an Enterprise Value (EV) of approximately

$5.5B for Micron (see Exhibit 23). This valuation assumes a growth rate of 4% which was

derived based on three factors: 1) industry trends, 2) Micron’s historical average growth,

and 3) nominal GDP forecasts (see Exhibit 24 for details on Micron’s growth rate

estimation). Further, it is assumed that the terminal growth rate for Micron will ultimately

be in parity with nominal GDP growth, estimated to be at 4.5%. Other key components of

the model (e.g. COGS, SG&A and R&D expenses, Depreciation, CapEx, and Restructuring

costs) were computed as percentages of revenue by assessing historical trends (see Exhibit

25 for FCF component estimations). Finally, the Weighted Average Cost of Capital (WACC)

reflects the company’s current costs of debt and equity (see details on WACC calculation in

Exhibit 26).

PART 2 – ELPIDA

III. A. Business Definition/Mission

Throughout the years, Elpida has taken a leading position alongside top DRAM companies

in the world, achieving the third highest share of the DRAM market. Its current stated

mission is “to become the world’s No.1 DRAM company that contributes to the digital

information society by providing advanced, highly functional, high-performance DRAM

products while maintaining cost competitive operations” (Elpida Memory Inc.).

III. B. Management Style

The original meaning of the word “Elpida,” namely “expectation” (of growth), suggests an

aggressive management style driven by growth. By the virtue of being Japanese, it is also

possible to assume Elpida as being a hierarchical company run by older executives who

typically stick with one or two companies for life. This can be evidenced by the fact that,

even in the wake of the company’s recent bankruptcy, the “same senior managers who ran

it into the ground still are at the helm, including the president as bankruptcy trustee”

(Mallard, 2012).

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When analyzing management’s role in Elpida’s failure, negative comments about its

executives abound. Bondholders have cited the actions of the president Yukio Sakamoto

with regards to Elpida’s proposed sale to Micron as lacking “transparency” (Tibken, 2012).

A user comment from an online article discussing Elpida’s failure indicates a culture

“…governed by the old guards who grew up in the manufacturing-driven mentality, not the

market-driven mentality” (Cheng, 2012). Although small in number, these two examples

reveal a potential dissonance between what management preaches and what actually gets

done (see Section III C3 – Organizational Values).

III. C. Organization Structure, Controls and Values

III. C1. Organizational Structure

Elpida’s organizational structure as of December 2011 is presented in Exhibit 15. The

organization has a hybrid structure partly organized around core business activities (e.g.

finance & accounting, sales & marketing, and general & administration), and partly

organized by the different product divisions under the DRAM Business Unit. The

Technology Development (TD) Office (name for Elpida’s R&D division in Taiwan) and the

New Memory Development Group, currently under the CEO, existed previously inside the

DRAM unit. It is assumed that this change was driven by the need of a central function

responsible for driving research and development of existing and new technologies, under

the direction of a Chief Technology Officer (CTO). Although not clear from the chart, the TD

Office oversees the different DRAM technologies used for each specialized market (e.g.

Mobile and Computing).

Taking all subsidiaries into account, Elpida had 5,800 employees as of March 2012, down

98 employees from the previous fiscal year, while the number of Elpida-only employees is

3,166, down 24 employees from the year before. In 2011, the average age of employees

was 35.6 years old, and the number of service years averaged 6.29 (Elpida Memory Inc.,

2011). The acquisition agreement with Micron calls for it to maintain Elpida's current

operations and employees.

III. C2. Organizational Controls

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Elpida has defined several bodies and committees to promote corporate governance and

ensure that business activities are in full compliance with the laws, regulations and the

company’s articles of incorporation (see Exhibit 16). Two important compliance-related

policies have been set forth by the Risk Management and Compliance Committee to date:

1) Elpida Code of Conduct, and 2) Internal Reporting "Compliance Helpline" System. The

first serves as a guideline of standards to be followed by all directors and employees, while

the second provides an open forum by which employees can anonymously report

violations to the Code.

Elpida also defines and maintains internal controls related to information management (to

ensure confidentiality of business information) and environmental practices (to assess and

reduce environment impacts from its operations).

III. C3. Organizational Values

Elpida’s organizational values are stated as follows (Elpida Memory Inc.):

1. “We will create value added ideas with our customers by providing them world

class leading edge technology and products.

2. We must demonstrate trust in the eyes of our employees, customers, shareholders,

business partners and stakeholders.

3. We must construct a working environment which has a completely open door policy

which enables each of our employees to develop and implement their original

ideas.”

These stated values suggest a company that place high focus on innovation, transparency

and trust. Indeed, the last two attributes are very typical of cultures where group

orientation, relationship and collaboration are of great importance. They are not merely

concepts, but a way of life which permeates to all aspects of corporate work and at all

levels.

Innovation at Elpida can be evidenced by the company’s financial commitment to R&D, and

its ability to create new technologies that support the evolution of mobile devices and

respond to growth in demand. In 2012 alone, Elpida has been granted around 200 patents

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as results of its product development capabilities and advanced process technology

(PatentDocs).

The company is also well known for its environmental principles and initiatives. In that

regards, Elpida’s vision has been to “proactively contribute to conserving energy and

preventing global warming throughout society, through the development and manufacture

of sophisticated energy-saving semiconductor products” (Elpida Memory Inc., 2012). This

vision is carried out by reducing environmental impacts throughout the product life cycle,

and by pursuing eco-factories with high production and resource utilization efficiencies.

For its continuous commitment to environment preservation through strict control

measures, Elpida has received various quality certifications (e.g. ISO9001and ISO14001)

and awards, such as the “2009 Global Warming Prevention Activity Award" by the Japanese

Ministry of the Environment.

III. D. Strategic Position Definition

III. D1. Corporate Level

Business Portfolio

Elpida’s core business is in DRAM memory products. Although the company does not

intentionally disclose segment-related information in its financial reports, its product

portfolio is generally classified into two main segments: Premier DRAM and Computing

DRAM (Elpida Memory Inc.). The Premier DRAM segment supplies DRAMs for the mobile

and consumer electronics markets, serving functions such as recording and playing of

images/videos. The Computing DRAM segment provides DRAMs for the low-cost,

commodity PC market, as well as the server market, which utilizes reliable DRAMs in order

to handle large amounts of data and to operate over long periods of time.

Rumelt’s Classifications

As mentioned in Section II D3 – Primary Competitors’ Business Level and Corporate Level

Strategies, Elpida is a DRAM-only player in the Memory industry. This fact classifies

Elpida’s corporate strategy as a dominant business.

Acquisitions, Mergers and Divestments

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Elpida has made a few acquisitions to further improve its cost competitiveness and

consolidate its leading position in the DRAM market. In 2005, it agreed with Advantest,

Kingston Technology and Powertech Technology Inc. (Powertech) on creating a new wafer

testing company called Tera Probe. To gain more control of the company, in 2009, Elpida

acquired common shares of Tera Probe through an exchange of its non-voting shares,

converting its ownership from an equity base into a consolidated subsidiary. Elpida

believed that its majority ownership would enable it to achieve greater efficiencies and cost

reductions (Elpida Memory Inc., 2009).

In a similar scheme, Elpida signed a joint venture with Powerchip in 2007, establishing

Rexchip Electronics Corporation (Rexchip) – a Taiwan-based manufacturing facility that

produces DRAMs with superior cost-performance. Elpida’s stake in Rexchip reached 52%

in 2008, and 65% in 2009, allowing Elpida to gain greater control over its management

(Elpida Memory Inc., 2009). As part of Elpida’s pending acquisition, Micron has agreed to

buy the 24% stake held by Powerchip to retain a total of 89% ownership interest in

Rexchip (Elpida Memory Inc., 2012). It is expected that one of Rexchip’s factory be

converted to make NAND flash chips once Micron’s acquisition completes.

Partnerships

Elpida has also engaged in a number of other strategic alliances that have enabled the

company to strengthen its product offerings and enhance its market share and revenue. In

2010, Elpida, Powertech, and United Microelectronics Corporation (UMC) reached an

agreement to deliver a 3D IC Logic + DRAM solution, by combining Elpida's capabilities in

DRAM, Powertech's assembly expertise, and UMC's logic technologies. The resulting

technology was “expected to improve cost competitiveness, improve logic yield, and

accelerate entry into the 3D IC market” (Elpida Memory Inc., 2010).

Most recently in 2011, Elpida and PTC signed another agreement, under which Elpida will

purchase all DRAM products manufactured by Powertech (Elpida Memory Inc., 2011).

Other strategic partnerships include the one with Walton Advanced Engineering, Inc, a

Taiwanese company, to whom Elpida outsources its packing and testing of DRAMs for

digital consumer electronics.

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It is apparent from its long history of partnerships that Elpida has been successful in

gaining new technological differentiation and manufacturing capacity from the companies

it partners with. Similarly, Elpida has represented an attractive option for other companies

given its position as the sole Japanese DRAM manufacturer, as well as its advanced R&D

capabilities.

III. D2. Business Level

As explained in Section II D3 – Primary Competitors’ Business Level and Corporate Level

Strategies, Elpida implements a hybrid business strategy by catering to mass market needs

with PC/Notebook DRAM, as well as to more specialized application of DRAM, such as

server.

III. D3. Resources & Capability Level

As in the case of Micron, Elpida’s Value Chain (Exhibit 17) supports its business strategy

classification and share many value and cost drivers with other companies in the industry.

However, Elpida has directed resources specifically to the mobile DRAM market, as

apparent from its specialized development and support centers. For a deeper look into

Elpida’s value and cost drivers, refer to Section II D4 – How Competitors Achieve their

Strategic Position, and for its V-C analysis, see Section II D5 – Value Minus Cost Analysis.

III. E. Financial Analysis

Performance and Operating Ratios

As the third largest DRAM manufacturer after Samsung and Hynix, Elpida holds a strong

market position that is critical to sustaining its revenue. On its latest financial statements

of December 2011 (Q3FY11 in Japan), the company reported $2.6B in revenue, a sharp

53% decrease from the previous fiscal year, when annual revenues had exceeded $5.6B.

Clearly, its financial performance deteriorated in 2011 as a result of a decline in DRAM

prices, lower demand for PCs, a fragile global economy and a stronger Japanese Yen, which

also contributed to lower sales as exports slowed down. Consequently, a whopping net loss

of $1.1B was reported in December 2011. This drastically contrasted with the profit

margin improvements of 2010 and 2009, which were highly welcomed by investors after a

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period of gloomy performance. As indicated in Exhibit 27, Epida’s profitability ratios

during the 2007-2011 timeframe have consistently remained far below industry averages.

The company has clearly struggled to remain profitable while competing with other large

DRAM players. The fact that Elpida has recently not been able to earn the needed revenue

to reverse profitability trends and to pay its debts has put the company in a very delicate

position vis-à-vis creditors. According to its latest quarterly report, the current ratio was

only 0.68, reflecting potential issues in meeting short-term obligations, while the debt-to-

equity ratio was 1.7, indicating an unhealthy amount of leverage even with solvency and

leverage ratios historically higher than competitors (see Exhibit 10). In February 2012,

Elpida sought protection from creditors, filing for bankruptcy for its massive $5B debt load.

Valuation

The Discounted Cash Flow (DCF) model yielded an EV of approximately -$5.14B (see

Exhibit 28). This valuation is based on a revenue growth rate of 3.3% (see Exhibit 29) and

on historical averages for COGS, SG&A, R&D expenses, Depreciation, and CapEx, as shown

in Exhibit 30. Depreciation was reduced by 60% (offer price of $2.5B is ~40% of Elpida’s

$6.2B current net Plant Property & Equipment), and all debt was ignored, since the

valuation was conducted after bankruptcy. In light of a less robust financial position and

higher perception of risk, the WACC percentage used for Elpida was higher than the one

used for Micron. Due to lack of recent financial statements, Elpida’s base year was assumed

to be 2011, the year in which the company published its last earnings release (December

2011 is equivalent to Q3 according to Japanese’s fiscal year). Moreover, to convert

financial statements from Yen to US dollars, yearly exchange rate averages provided by the

IRS were used. As explained in Exhibit 31, merger with a bigger firm would provide Elpida

with scale and diversification needed to streamline its most significant valuation drivers:

COGS and CAPEX. Its high WACC and susceptibility to currency fluctuations can also be

mitigated as part of a bigger diversified company like Micron.

IV. ANALYSIS OF THE EFFECTIVENESS OF THE STRATEGY

IV. A. Is Acquisition the Right Move?

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As a first step in analyzing Micron’s strategic move, we will utilize the appropriate

frameworks for M&A situations as follows.

IV. A1. Make vs. Buy

The Wireless Solutions Group – Micron’s business unit that sells to wireless customers –

represents only 14% of Micron’s total revenue. Out of these 14%, only a part is attributed

to DRAM. With mobile DRAM being the highest growing segment of all DRAM products,

Micron would have to improve its presence in the mobile DRAM space to remain

competitive. To develop that capability in-house, Micron would need to build a fab at a cost

of approximately $6.5B, increasing its debt significantly. In addition, it would take about

two years before the fab becomes operational and its yield is acceptable. Not only does

Elpida offer a ready-to-use fab at the required technology node, but it also supplies

contracts with important customers. Acquiring Elpida will give Micron a “Make” capability

of a strategic importance at a fraction of the costs of a new fab.

IV. A2. Ally or Acquire

As seen in Exhibit 18, the recommendation of the “Ally or Acquire” framework is an

acquisition.

IV. A3. Porter’s Tests

Industry Attractiveness Test

As shown in Section II B – Six Forces Analysis, the DRAM industry is not a favorable one.

However, both companies were already operating in that industry. The acquisition of

Elpida by Micron is an example of a horizontal diversification, where the acquiring

company adds products that appeal to the company’s current customer groups. By looking

at the specific segments being affected by this merger, we realize that Micron is actually

adding capabilities to a currently favorable segment of the DRAM industry, which is the

mobile DRAM.

Better-Off Test

We believe that both companies will be better-off following the acquisition. Elpida gains a

lifeline after its bankruptcy, while Micron gains state-of-the-art manufacturing facilities

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that would otherwise require huge capital investments, as well as an increased share in the

mobile DRAM market. Expected synergies for the “Most Likely Case” scenario are detailed

in Exhibit 32 and are further explained in Section IV C – M&A Valuation.

Cost-of-Entry Test

The financial analysis and valuation of the companies indicate that in present value terms,

the value of the combined entity is greater than the sum of values of the stand-alone

entities in the normal and best case scenarios (see section IV.D – M&A Valuation below).

The worst case scenario results in a loss of value of about $4B for Micron. Another

important factor which makes the cost-of-entry test favorable for Micron is the terms of the

acquisition deal. Micron will pay $750M cash in the first year, and the rest will be paid in

yearly interest-free installments over a 7 year period. Those terms mean that Micron will

not assume any debt as a result of the acquisition and will be able to finance it by using

cash flow generated from Elpida’s operations. In a hypothetical situation, Micron can

reduce potential losses by shutting down Elpida’s foundries, thus avoiding payment of

some of the installments.

IV. B. Combined Resources and Capabilities, V-C, and Industry Conditions

After establishing that the acquisition is indeed the right move for Micron, we can further

analyze how the acquisition will improve Micron’s current position in DRAM, and how it is

expected to change the industry dynamics.

The DRAM industry is expected to benefit from the acquisition. More consolidation means

less oversupply, especially in the PC/Notebook segment, as Micron diverts Elpida’s output

mostly to mobile DRAM. As a result, at least in the short term, prices are expected to

stabilize in the PC/Notebook segment. The value offering that is provided to customers by

the combined entity is also expected to improve. The increased capacity will lower the risk

of shortages of DRAM supply for mobile customers. The combined Value Minus Cost

analysis (see Exhibit 19) assumes that, over time, Micron will be successful in absorbing

Elpida’s capabilities both in lower-cost process development and in high-quality memory

design. The results show that the combined entity offers higher value than standalone

Micron or Elpida. Specifically in the server market, improved product design capabilities

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are expected to increase the value significantly. On the cost side, the combined entity is

expected to enjoy improved costs once it migrates to the advanced tech node where Elpida

is.

A combined VRIO analysis (Exhibit 20) indicates Micron achieving a strong competitive

advantage in bundled multi-chip-packaging, by utilizing Micron’s NAND flash and Elpida’s

strong brand. Elpida’s technology and experience using gas-powered power sources and

environmentally friendly waste reduction may improve Micron’s position in the case of

future government regulations.

IV. C. M&A Valuation

The synergies in Exhibit 32 are valuated under three distinct case scenarios whose details

are explained below. Note that the predicted impacts of the synergies are relative to

Micron’s base year of 2012. While it was observed that “EV(Micron) + EV(Elpida) > EV

(MU+Elpida)” held true in the “Most Likely Case” and “Best Case” scenarios, it was not the

case for the “Worst Case” scenario. Exhibit 33 summarizes the valuation of those synergies

for all scenarios.

IV. C1. Most Likely Case Scenario

The synergies are expected to trigger an increase in revenue growth of 1.5%, in addition to

the 4% growth forecasted for Micron in Exhibit 24. Due to an improved negotiating power

with suppliers and to new manufacturing efficiencies, COGS are expected to drop by 2%.

Similarly, as a result of higher operational efficiencies, SG&A is also expected to decrease by

5%. The combined strong R&D focus of both companies is likely to yield a cross-

fertilization of ideas. A 10% decrease in R&D is likely to occur as a result of resource

strengthening and consolidation.

Restructuring costs related to Elpida’s integration are assumed to be $500M and $250M

applied over the first and second post-acquisition years, respectively. Finally, Capex as a %

of Revenue is expected to decrease by 50% from 2013 through 2015 as Micron will not

need to make new PP&E investments. In light of these assumptions, we estimate the

combined valuation to be $9B (see Exhibit 34), of which $6.6B are attributable to synergies.

IV. C2. Best Case Scenario

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Revenue growth is expected to increase by 2% due to better than expected synergies.

Considering a baseline growth rate of 4%, the resulting growth rate used for the

projections is 6%. Under this scenario, the impact on COGS is translated by a 3% reduction,

assuming that Micron’s negotiation power with suppliers should improve even more. It is

assumed that SG&A and R&D expenses will experience decreases of 7% and 15%

respectively. These decreases are directly linked to better than expected operational

efficiencies, as well as higher levels of resource utilization and consolidation. Restructuring

costs for facilitating the integration of Elpida are assumed to be the same as in the previous

scenario; therefore, CapEx as a % of revenue is also expected to decrease by 50% for the

three coming years, after which it should return to the levels observed in the in Micron’s

standalone valuation. Based on these assumptions, we forecast a combined valuation of

$14.02B (see Exhibit 35), of which $11.62B relate to synergies.

IV. C3. Worst Case Scenario

If size negatively affects performance of the combined firm, or if Micron fails to implement

the changes in product mix, revenue growth is likely to shrink by 0.3%, therefore reducing

the combined-firm growth rate to 3.7%. A decrease of only 1% in COGS is factored in to

account for weaker than expected bargaining power against suppliers. SG&A expenditures

are expected to decrease by only 3%, while R&D expenditures would drop by only 5%.

Both cases indicate integration challenges that hinder efficiencies, resource consolidation

and utilization. As in the other two scenarios, CapEx is not expected to be impacted by

worse than expected synergies. The assumption that Micron decreases CapEx as a % of

revenue by 50% remains valid for the next three years, as the company plans to focus on

the adaptation and utilization of Elpida’s manufacturing facilities. Note that a 6% tax rate

adjustment was applied to account for a weaker financial performance. Accounting for all

the above assumptions, we reach a combined valuation of $1.74B (see Exhibit 36), with

synergies representing a cost of $0.66B.

IV. C4. Valuation Conclusion

Micron is taking non-trivial risk with this acquisition. Though the “Most Likely Case”

scenario shows sufficient synergies to overcome the disastrous cash flows of standalone

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Elpida, and though the price offered is flexible based on future results, bad execution on

monetization of the synergies could ruin Micron’s income statement and future cash flows.

The “Worst Case” scenario shows a $4B reduction in Micron’s valuation, in addition to

acquisition costs.

Micron is experienced in integrating acquisitions. Growth by acquisition has been its

strategy for the last fourteen years. The results of a sensitivity analysis for the combined

company (see Exhibit 37) showcase the most critical drivers of success as WACC, Revenue,

Tax Rate, and CapEx. Revenue and CAPEX synergies are the most obvious, but the

debt/equity structure of the firm needs to be optimized to minimize WACC in the current

ultra-low interest rate environment. Taxes versus variable costs need to be optimized

jointly before deciding in which foundry to produce when capacity is not fully utilized.

Full-fledged tax planning of production is beyond the scope of this paper. We are fairly

confident in Micron’s ability to focus on these critical drivers and quickly improve the cost

structure for the new foundries, as well as to liquidate aggressively if results don’t pan out.

However, executive ego and emotional attachment should be monitored and avoided in the

crucial first three years post-acquisition. With good execution, the deal is decently

profitable, despite the high risk it poses.

IV. D. Other Critical Issues

Micron will need to bridge both cultural and geographic distances between Elpida’s team,

in Japan, and Micron’s, in the U.S. In the past, Micron developed videos and wrote material

to train its workforce overseas. However, in order to effectively absorb Elpida’s technical

know-how, Micron’s engineering team must be willing to listen and learn from a foreign

team.

Elpida’s office will also be in a strong position to support Micron’s supply-chain in Asia.

This includes product packaging and testing in Singapore, and Micron’s DRAM venture

(Nanya) in Taiwan. Introducing a local and talented DRAM team in this region may

increase overall productivity in Asia, but may only be accomplished with strong

management support and thoughtful integration efforts both at the group and corporate

management levels.

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Micron should also explore how to structure its ownership of Elpida with respect to Japan’s

unfavorable currency exchange policy. This includes minimizing investments into Japan

and potentially structuring its supply chain to finish manufacturing (i.e. back-end test,

packaging) of DRAM products originating from Japan in a country with more favorable

currency. Micron may also consider financial instruments that periodically attain a fixed

exchange rate to minimize any changes to profitability.

V. RECOMMENDATIONS

V. A. Short-Term and Long-Term Recommendations

V. A1. Short-Term Recommendations

Start Integration As Soon As Possible

Our valuation of the combined company assumes that synergies from the acquisition are

apparent as soon as 2013; otherwise, it will be difficult to justify the move. As such, we

recommend Micron to start integrating with Elpida as soon as possible. The main purpose

of speeding up the process is to give Micron faster control over Elpida’s operations and

allow it to realize the synergies from both value and cost sides. Following are

recommended areas of focus:

Interface with Customers: Elpida’s customers, including Apple, are a strategic asset for the

combined company. Retaining those customers by streamlining sales and customer service

is one of the most important tasks for Micron.

Production: Micron should take control over production decisions immediately. The main

purpose is to define its future product mix, as it will be discussed in the second

recommendation.

Finance: To turn over Elpida’s performance, Micron needs immediate access to its financial

data. As a Japanese company, Elpida did not report its financials using GAAP standards, a

fact which makes the integration more complicated. Therefore, it is imperative that

Elpida’s financial reports be aligned as soon as possible.

Revise Product Mix

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Mobile: Mobile DRAM is currently the highest paying DRAM product with a 2x multiple

over PC/Notebook DRAM, but Micron’s share in this market is negligible. Elpida, however,

had already gained a strong foothold in the mobile DRAM market and was in the process of

migrating most of its output to the advanced 32nm and 25nm tech nodes (Elpida, 2012),

which targets primarily mobile device makers. In light of that, we recommend Micron to

decrease the share of PC/Notebook in its mix, and increase the share of Mobile DRAM

significantly and quickly. Nomura analysts estimate that Samsung’s and Hynix’s mix of

DRAM products is comprised of approximately 25% Mobile, 25% Server, and 15%

Specialty, with the remaining 35% as PC/Notebook DRAM (Nomura Equity Research,

2012). We recommend that Micron take steps in the next two years to make its product

mix similar to that of Samsung and Hynix. Realistically, in 2013, Micron can probably

achieve 18% mobile DRAM (Nomura Equity Research, 2012), which, according to our

valuations, translates into 11% improvement in revenue, 30% improvement in gross

margin, and almost 50% increase of EBIT (see Exhibit 38).

Specialty: Elpida’s second strongest segment was specialty DRAM, which is also a well

performing segment for Micron. Micron can build on Elpida’s capabilities for this segment,

and also capitalize on its own developed channels to sell a greater volume of Elpida’s

products.

Mutichip Package (MCP): In Memory MCPs, two memory types – DRAM and NAND – are

packaged into a smaller size, low profile chip. An MCP is especially attractive to the mobile

market, where printed circuit boards get smaller and thinner with each new generation of

products. Micron already offers MCPs with its own DRAM and NAND. We recommend that

it develop a new offering containing Elpida’s DRAM and Micron’s NAND. Micron can also

build on the competencies that were accumulated in Akita –Elpida’s subsidiary that

specializes in low profile packaging.

Migrate Capabilities

With Elpida’s acquisition, Micron inherits a distinct set of capabilities, including high

quality process design and knowledge in mobile DRAM. As Micron takes control of Elpida,

we recommend that it take a leaf out of Samsung’s textbook and use learning to its

advantage. In Micron’s case, this means not only preserving those capabilities, but also

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migrating Elpida’s process design know-how into its own processes and facilities. We

recommend that Micron form teams from both companies that will spearhead the process

and deal with change management aspects. A good place to start this transfer would be in

Taiwan, where Elpida’s Rexchip and Micron’s Inotera are located.

V. A2. Long-Term Recommendations

Samsung is expected to achieve the 15nm technology node in 2015-2016. When it does

achieve that, Samsung will again have a great cost advantage over any competitor that is

not able to get to the same point. Based on the rate of decline in DRAM ASPs, and on our

estimates for the cost in the current and next technology node, we conclude that, by 2016,

Micron will not be profitable if it does not upgrade to 15nm (see Exhibit 39). The same

logic applies to Hynix as well.

Samsung scares many big players in the semiconductors industry, and the strategic threat

it poses might be Micron’s best asset. We here discuss three non-mutually-exclusive

recommendations that can change the current rules of the game.

Merge with Hynix

Micron is probably looking at Hynix like a predator hungry for their next prey, i.e. it is

expecting Hynix to go bankrupt or face a dire financial situation, which will then provide

Micron with their next cheap capacity/market share expansion by acquisition. Like Micron,

Hynix is well diversified into all memory segments, while being a pure-play memory

company that does not scare the competition. There are practical benefits to merge with

Hynix sooner than later:

Such a merger would provide the unified entity with double the market share each

of them currently holds. This would provide the combined company with a much

better control over future capacity expansion, pricing volatility, and negotiation

power.

There are a lot of cost-cutting synergies that can be monetized from consolidating

duplicate secondary activities.

Though the combined entity will still miss the more accurate forecasting abilities

that Samsung enjoys, it can direct its doubled R&D budget towards differentiated

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future memory technologies (e.g. Memristors). Differentiating the memory

technologies away from its current commodity nature is one way to avoid the losing

process-manufacturing race dominated by Samsung for the last decade.

The combined entity will now have an extra value-driver in the Mobile and Tablet

markets, being the only non-Samsung. As explained in the following

recommendation, Samsung competitors like Apple and HTC don’t want to have

Samsung as their only DRAM supplier. Merger with Hynix would likely pass anti-

trust court sniffing tests.

It is important to note that, in 2002, Micron attempted to acquire Hynix’s memory business.

The deal had already been announced, when Hynix’s directors backed off and finally

canceled it (Hoovers, 2012). If Micron is to go after Hynix again, it will have to take a close

look at the factors that worked against it in 2002, making sure to readily address them.

Deep cultural differences, among other things, can hinder such a move.

Position Itself to Be Acquired by Apple

We see this as the most logical and probable scenario once a single player is left out of

Micron and Hynix, whether through bankruptcy or merger, but it is also possible at the

current state of consolidation. Apple has proven product design and marketing

capabilities, but it is not a semiconductor company. Apple currently procures most of its

memory needs from Samsung: a safe and stable relationship as long as multiple other

capable suppliers exist in the market. The situation would be much more risky if Samsung

presses its advantages until both Micron and Hynix are squeezed out. Anti-trust laws are a

very risky deterrence for a monopolist, as proven repeatedly by Microsoft. The phone and

tablet markets are orders of magnitude bigger, faster growing, and more profitable than

the memory market. Samsung would not run out of barely legal (or outright illegal) moves

to leverage their memory dominance into those fields. The consolidation of memory

manufacturers is becoming a true risk for the fabless Apple. Next step of consolidation will

force Apple to acquire the only remaining non-Samsung. We see a full acquisition more

probable than equity investments or joint ventures, since Apple’s ability to forecast market

memory demand would help Micron neutralize Samsung’s competitive advantages. Apple

also has very deep pockets, which can potentially enable the development of a disruptive

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memory technology (other than straight forward node reduction) that might change the

commodity nature of the market.

The same acquisition logic can be applied to some extent to other customers, such as HTC

or Motorola, giving Micron some options when the time comes to negotiate such an

acquisition. Apple, however, has the most to lose and the most to protect given its

dominant market position.

Partner with Intel for DRAM Process Development

In the past, Intel has partnered with Micron to create IMFT, a joint investment 51% owned

by Micron that brought to market 34nm flash memory in 2008 and that achieved industry

leading 20nm flash memory in 2011. These partnerships benefited Micron through an

improved competitive position over Samsung and Hynix, while benefiting Intel by

maintaining a lower CR4 in NAND memory.

Both companies may seek a future DRAM partnership as a way to lower the threat of

Samsung achieving the next future DRAM product based off of 15nm design rules. As

mentioned in Section II E2 – Threats & Opportunities, the threat of Samsung attaining this

technology would improve Samsung’s cost-competitive position, lowering profitability for

both Micron and Hynix.

Intel is expected to reach 15nm capabilities in 2014 and holds equity investments in ASML

(along with TSMC and Samsung), which is the sole provider of 15nm EUV lithography

equipment. A partnership with Intel will likely provide near-term access to critical process

equipment from ASML, as well as the ability to reach low cost and low power 15-nm DRAM

mobile products, potentially providing a lead ahead of Samsung’s DRAM development.

V. B. Strategy Implementation

V. B1. Implementation of Short-Term Recommendation: Revise Product

Mix

In implementing the change in product mix, we see the most value for Micron in the short

term. The challenge for Micron is to be able to capitalize on the acquired resources and

capabilities soon and enjoy the higher margins that follow.

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Assessment of Current State: The first step that Micron has to take when the acquisition

formalities are completed is to know the ins and outs of the facilities, resources, and

capabilities that it inherited from bankrupt Elpida. This step may sound trivial, but in

acquisition situations, the acquiring company can only know so much about the acquired

company during the process of negotiations. Specifically in Elpida’s case, the challenge is

even greater because its last operational report was published in the beginning of 2012,

and the last annual report was published around mid-2011. From a product mix

perspective, the main question to ask is how much of Elpida’s capacity was actually

migrated to the 32nm and 25 nm tech nodes, and what efforts are still needed to complete

the migration.

Timeline: Based on analysts estimates, we expect the combined company to have as much

as 15-18% mobile DRAM in its output in 2013 (Nomura Equity Research, 2012). During

2014, Micron should strive towards 25% mobile DRAM.

Finance: Analysts such as Credit Suisse and ThinkEquity estimate that an additional capital

investment of approximately $800M is required to complete the migration of Elpida’s fabs

and bring them to full capacity (Credit Suisse, 2012; ThinkEquity, 2012). With

approximately $2.5B in cash at the end of 2012, we do not expect Micron to add to its debt

to finance this activity.

Customer Retention: To be able to benefit from the change in product mix, Micron must

make sure that it retains Elpida’s mobile customers. Micron should take steps to ensure

that supply is not affected by the bankruptcy or by the integration efforts. In addition,

Micron must preserve Elpida’s sales channels, at least in the short term, and at the same

time send reassuring messages to customers from Micron’s headquarters in Boise.

V. B2. Implementation of Long-Term Recommendation: Partner with Intel

for DRAM Process Development

Achieving a competitive DRAM process technology is paramount for Micron to maintain its

cost-competitiveness and low-power DRAM products that are in high-demand within the

mobile tablet and smartphone markets. Developing a leading edge process node will

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require years of development and spending which Micron will need to begin in the near

future.

Alliance Formation: Micron and Intel will need to assess their compatibility to partner in a

joint DRAM venture. While it is assumed that partner compatibilities and complements

will remain the same, as seen in the IMFT venture, both parties will need to review their

commitments in achieving a competitive process node in DRAM memory.

Joint Venture Creation: Creation of the joint venture assuming similar equity and

investment sharing arrangement (51% ownership by Micron). We assume that the

partnership design (provisions, governance) can heavily leverage the trust and relational

capital also developed through the IMFT partnership over the past five years. We believe

that Micron’s wafer facilities in Boise, Idaho will be a likely location for joint wafer

development. Alternatively, a wafer facility in Portland, Oregon can also be used.

15-nm Process Development: We assume that a 15-nm DRAM product and process

development may not begin until late 2013 with products ramping to mass production

until 2015.

Supply Agreements and Exit: With competitive 15-nm DRAM products ramping to mass

production in 2015, we see Intel benefitting from a sole-source competitively priced mobile

DRAM to use along with its mobile chip sets. With improved profitability, we see Micron

taking the majority share of equity investments using positive operational cash flow. By

2016 or 2017, Micron can potentially acquire Intel’s share in this venture.

V. C. Recommendations for Corporate Social Responsibility & Ethics

V. C1. Short-Term Recommendation

The manufacturing of semiconductor memory products requires many substances that are

hazardous to humans and to the environment. RoHS (Restrictions of Hazardous

Substances) is a European Union (EU) ordinance that restricts the use of six materials in

the production of electrical and electronic equipments: Lead, Mercury, Cadmium,

Hexavalent Chromium, Polybrominated Biphenyls and Polybrominated Diphenyl Ethers

(RoHSGuide.com, 2012). Micron provides both full RoHS-compliant products to meet EU

66

standards and 5/6 RoHS-compliant for other regions. The 5/6 compliant products use

lead, which is one of the prohibited substances under RoHS (Micron, 2012). Micron does

have the capability of producing lead-free products and offers these selectively to

customers who request it. Our recommendation is for Micron to fully eliminate products

with lead and to supply RoHS-compliant products to all customers in all regions. In

addition, other substances causing pollution have been identified by EU’s REACH

(Registration, Evaluation, Authorization and Restriction of CHemical substances) and

ROSH 2.0 policies (European Commision, 2012). Micron should also voluntarily and

proactively phase out these hazardous substances. Military and other critical organizations

could continue to be the only exceptions.

V. C2. Long-Term Recommendation

The Electronics Industry Citizenship Coalition (EICC) provides guidance to companies in

the areas of environment, ethics, health and safety, labor, and management system (EICC,

2012). The guidance comprises of issues such as working hours in the electronics industry,

minerals extraction policies (e.g. procuring raw materials from conflict-free areas), and

environmental sustainability. Micron joined the coalition in August 2008 (Micron, 2012).

To monitor their suppliers against the EICC guidance, Micron provides a questionnaire

regarding their practices and evaluates the responses, later seeking remedies if the

responses show non-compliance with the guidelines. However, Micron does not perform

any further audit of these firms, taking their responses in good faith. This is similar to how

Apple initially used to manage its relationship with Foxconn. However, later auditing of

Foxconn showed many violations, and Foxconn was forced to fix those issues (Wall Street

Journal, 2012). We believe Micron’s current audit of their supplier compliance is grossly

inadequate. As a good CSR practice, Micron should take the responsibility of ensuring that

all its suppliers meet the EICC standards by:

1. Requiring all suppliers to meet or exceed the EICC guidelines.

2. Developing an internal auditing capability and/or partnering with other EICC-

certified auditing companies to audit all their suppliers.

3. Conducting a periodic audit of all their suppliers and setting up remedial policies for

them to meet compliance within a timeframe.

67

4. Coordinating with other companies to share these audits and benefit the industry by

building a strong list of EICC-compliant suppliers.

VI. CONCLUSIONS

Firms within the DRAM industry have faced increasingly unfavorable conditions with rising

equipment costs and a TAM that has remained stable at $25B over the past decade.

Constantly rising CAPEX requirements, combined with falling ASPs have failed Elpida

despite excellent product and customer execution. Only firms with a broader mix of

memory and other semiconductor products approaching different buying groups (e.g.

Micron with NAND, NOR, and DRAM for server, PC, and specialty memory groups) have

remained solvent.

Our analysis supports Micron’s acquisition of Elpida. We believe that the acquisition closes

a hole in Micron’s technology and product portfolio at a much lower cost than Micron

would pay to develop both internally. However, in the long-term, we believe that Micron is

at risk of succumbing to Samsung’s sustainable competitive advantages, where it continues

to increase its cost-competitive position through a growing market share and technology

investments driven by a strong cash flow. Micron will remain competitive only if it finds a

way to match Samsung in both cost leadership and increased scope. For this reason, we

recommend Micron to broaden its partnerships with Intel beyond NAND, to include DRAM

in order to reach the next 15nm technology node ahead of Samsung. We also suggest that

Micron continue investing into disruptive memory products (i.e. Memristors) and share

development costs through a partnership with its rivals (i.e. Hynix), in order to introduce

other growing memory products into its semiconductor businesses.

We see Micron’s stock as speculative and recommend buying as a small percentage of a

diversified portfolio. In the short term, Micron’s stock faces risks due to uncertainties in

the market driven by volatile ASPs. However, we see a potential gain in market value if

Micron can aptly adopt Elpida’s product line and rebalance the combined product mix in

favor of a more profitable mobile and server DRAM. Shareholders holding a long position

will need to watch Micron’s technology moves relative to its competitors. Information

68

typically shared through Micron’s investor relations will indicate the risk of lagging

technologies (relative to Samsung) to the stock’s market value at least one year

beforehand.

69

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VIII. MAIN APPENDIX

Exhibit 1: DRAM Industry Diagram

Exhibit 2: Six Forces Analysis – Level One

Barriers to Entry [Score 1 – Favorable]

Factors Affecting Barriers to Entry

Effect Strength Rank Reasoning

Economies of scale (supply side)

Favorable 1 2 DRAM firms face extremely high economies of scale with new fabrication plants costing $4.5B to $6.0B. The top four leading DRAM firms have maintained the majority of market share with each owning two or three DRAM plants, indicating high Minimun Efficiency Scale (MES) despite being able to achieve cost economies within a single plant. Extremely high volumes are required to re-coup fixed costs forming a high barrier to entrants.

Network effects (demand side benefits of scale)

Favorable 1 3 Customer willingness to purchase from firms is jointly dependent on product competitiveness and low-cost high-performing technology along with ample DRAM capacity. Samsung is a strong example with spending of over $10B per year in purchasing of new equipment and supplying 37% of DRAM capacity in 2012. The CR4 of DRAM is 91%

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allocating the majority of revenue largely into the top four DRAM suppliers.

Customer switching costs

Moderately Favorable

2 1 Memory suppliers adhere to using JEDEC standards (see www.jedec.org), accommodating standardized package sizes and chip interfaces. Major customers typically require DRAM vendors to cross-license differentiating features as a means to enable dual or multi-sourcing as a means to minimize costs. However, buyers may create supply-agreements and/or choose to work mainly with companies using the best technologies raising switching costs in some cases.

Capital requirements Favorable 1 1 New entrants face a capital expense of $6B to develop a 22nm fabrication facility along with $750M in development costs. These costs are significant given the $25B forecasted market TAM for 2012. DRAM facilities typically require 2 years to build and another 1-2 years to ramp their DRAM production. The high cost and long period is coupled with the risk of significant market changes over the long-term.

Incumbent advantages independent of scale

Moderately Favorable

2 1 Patents and cross-patents are a major advantage to current players (Elpida’s 6000 patent portfolio is a big part of its assets acquired by Micron). But fast technological progress might render most of these patents obsolete if a new player emerges using a different manufacturing process. Tacit knowledge, sourcing experience, and organizational prowess are barriers to entry that can be acquired at a very high cost.

Unequal access to distribution channels

Moderately Unfavorable

4 4 No distribution channel is needed for this commodity. Major device manufacturers who buy in bulk do not prefer to count on unproven producers. As long as the pricing is not different for the same modular product, incumbents have a small advantage accessing big customers.

Restrictive government policy

Unfavorable 5 4 Semiconductor and memory manufacturing is a global industry that is subject to the “Information Technology Agreement” (ITA) enforced by the World Trade Organization. In this highly visible, no-substitute industry, any tariffs, subsidies, or restrictions will be retaliated against on an international scale. Limitations to trade freedom need international consensus that is hard to happen, even against countries like Iran or North Korea.

Expected retaliation Favorable 1 1 The top four DRAM firms are incentivized to oversupply the market in order to form a barrier to entry for other entrants. Incumbents also compete with each other to achieve higher die-per-wafer lower-cost technology nodes before the other as a means to increase supply become more cost competitive. This over-supply combined with downwards cost pressure and falling revenues in the DRAM TAM $25B (-15% compared to 2011) effectively deter entrants into the DRAM market. These ultra-competitive forces in a stagnant market form a strong retaliation facing new entrants.

Threat of Rivalry [Score 4.5 – Moderately Unfavorable]

Factors Affecting Rivalry Effect Strength Rank Reasoning

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Industry concentration Moderately Unfavorable

4 2 CR4 = 91% (Samsung, Hynix, Elpida, Micron)

Is the industry growing at a decreasing rate or increasing rate?

Unfavorable 4.5 2 The industry TAM has decreased over the past two years from $39B to $25B. While the amount of memory shipped has doubled to 30 billion gigabits, the DRAM ASP has further dropped due to oversupply and lower-cost technology nodes, further increasing competition among firms.

Are exit barriers high? Neutral 3 3 DRAM firms require specialized high-cost equipment and know-how. Firms within this industry may choose to operate despite earning negative margins. However, firms with negative margins will also face pressure to exit from lower revenues given that high-volume buyers tend to avoid buying from firms with older technologies.

High commitment by rivals Unfavorable 5 1 The DRAM industry has reached a high maturity stage having shrunk from 20 firms in 2000 to less than 10 with a CR4 of 91%. With a shrinking TAM, these firms are highly committed to retaining or increasing capacity to fuel R&D investments.

Competition along the same or differing dimensions

Unfavorable 5 1 The high concentration within equipment suppliers has led DRAM firms to adopt the same type of technology processes that require high R&D and capital expenses to achieve these newer technology firms. The first firms to adopt these nodes are rewarded with competitive product costs and higher customer value. This need to continuously invest in order to remain competitive must be met with selling memory in high volumes at increasingly low ASPs.

Do firms have diverse goals/ideas about how to compete?

Moderately Unfavorable

4 2 DRAM firms have all adopted the same strategy to achieve high market share with a low-cost diversified portfolio. The four major firms are attempting to or have also succeeded in expanding into non-volatile NAND memory since 2004, NAND memory has grown to a $22B industry in 2012, allowing these firms to effectively bundle DRAM and NAND in customer sales.

Degree of product differentiation

Neutral 3 1 Despite the strong requirement to commoditize in the PC space, DRAM firms are finding ways to specialize in specific customer segments. This includes power and size (mobile), and reliability (specialty, server). Differentiation also occurs by not forward integrating, i.e. by not playing a dual-role as supplier and rival The effects are evident for example in mobile buyers accepting an ASP premium greater than 100% over that of PCs.

Fixed costs/variable costs ratio Moderately Unfavorable

4 1 Memory manufacturing is a capital-intensive industry with high fixed costs including equipment depreciation and R&D. Variable costs is negligible compared to fixed costs (Acrossemi, 2011).

Is capacity added in large increments?

Moderately Unfavorable

4 4 The plants have high capital investments in the billions of dollars and companies will have to add large capacity for a single plant in order for the operations to be economical. Increased capacity due to new plants increase rivalry in the industry.

Buyer Power [Score 2.5 – Neutral]

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Factors Affecting Buyer’s Bargaining Power

Effect Strength Rank Reasoning

Are buyers concentrated?

For Tablets & Smartphones (Mobile)

Moderately Unfavorable

4 CR4 = 58% (Nokia, Samsung, Apple, LG)

For Servers Unfavorable 4 CR4 = 78% (HP, Dell, IBM, Fujitsu) For PCs & Notebooks Moderately

Unfavorable 4 CR4 = 52% (HP, Lenovo, Dell, Acer)

For Specialty Applications Moderately Favorable

2 We believe that the CR4 is low given the broad usage of specialty memory into a wider range of industries including automotive and medical devices.

Net Effect: Moderately Unfavorable

3.5 3 To a large extent, buyers are concentrated, with over 50% concentration in each category.

Are the products differentiated?

For Tablets & Smartphones Moderately Favorable

2 Mobile firms expect low power consumption, high reliability, and ample capacity before using a mobile DRAM product. The preference for features will lead buyers to choosing the highest performing parts. However, mobile DRAM firms will expect a DRAM firm to license differentiators to other vendors in order to enable dual or multi-source DRAM supplies.

For Servers Moderately Favorable

2 Buyers will select DRAM products based on the overall speed, latency, and reliability.

For PCs & Notebooks Unfavorable 4 PC buyers value purchasing DRAM at the lowest cost possible, therefore they expect the lowest differentiated DRAM products.

For Specialty Applications Moderately Favorable

2 Specialty DRAM buyers differentiate products based on the range of temperatures they can be used in and on the number of years the firm will commit to manufacturing the DRAM.

Net Effect: Moderately Favorable

2.5 2 Each buyer group has varying requirements specific to their segment. The requirement for low cost and multi sourcing lowers the overall value of these differentiators.

Does the buyer face low or high switching costs?

For Tablets & Smartphones Moderately Favorable

2 Mobile DRAM products have standardized interfaces, leading to lower hardware switching costs. Mobile DRAM capacity has been limited, leading to the existence of volume agreements between firms.

For Servers Moderately Favorable

2 Server firms will spend more effort qualifying DRAM products for reliability at the maximum and minimum of their product specifications. Due to the effort required to select DRAM, server firms are less likely to switch DRAM products despite similar hardware interfaces between products.

For PCs & Notebooks Unfavorable 5 PC firms demand PC/Notebook DRAM products to be interchangeable achieving the lowest cost possible in products.

For Specialty Applications Favorable 1 Specialty product vendors will select a product that is guaranteed to be in production for long periods of time (~10 years). Not all DRAM firms provide that capability, so switching costs for this buyer group is slightly higher

Net Effect: Moderately sFavorable

2.65 1 Specified DRAM products have lower switching costs due to the effort they place in selecting products or requiring guaranteed supply agreements. PC vendors however expect very low switching costs. Based on their higher

80

revenue volume within the DRAM industry, they increase the weighting to moderately favorable.

Do the buyers pose a backward integration threat?

The high cost of memory plants (~$3.5B / plant) means backwards integration is unlikely.

For Tablets & Smart Phones Favorable 1 Low threat although the vendor (Samsung) is already backward integrated. None of the buyers demand sufficient volume to warrant the high fixed cost required to produce DRAM.

For Servers For PCs & Notebooks For Specialty Applications Net Effect: Favorable 1 1 Low threat of backwards integration. Factors Affecting Buyer’s Price Sensitivity

Is the product a significant fraction of the Buyer’s costs?

For Tablets & Smartphones Moderately Unfavorable

4 4% total COGS based on survey of numerous brands.

For Servers Moderately Unfavorable

4 12% average COGS derived from memory & server costs.

For PCs & Notebooks Moderately Unfavorable

4 4% total COGS based on PC, Notebook, and Ultra-Books.

For Specialty Applications Moderately Unfavorable

Assume that the DRAM is not a significant percentage of the product COGS.

Net Effect: Moderately Unfavorable

4 2 Despite DRAM’s importance, the product does not command a large enough percentage of the product’s bill of materials.

Does the buyer earn low profits?

For Tablets & Smartphones Moderately Unfavorable

3.5 High end smart phone and tablet vendors are known to earn above 30% margins. Low end vendors earn much lower margins (~5% margin).

For Servers Moderately Favorable

2 Servers are assumed to earn above 30% gross margins estimated from HP’s 2011 10K report.

For PCs & Notebooks Unfavorable 4 Most buyers earn low margins (~5%) in PC and notebooks. Data also based off of HP’s 2011 10K report.

For Specialty Applications Favorable 2 Assume that specialty products in the medical and automotive field earn high gross margins.

Net Effect: Neutral 2.875 1 Overall the buyer does not make high margins in the PC and some of the mobile devices yet there are higher gross margins in server and specialty products.

Is the quality of the buyer’s product affected by the industry’s product?

For Tablets & Smartphones Moderately Favorable

2 Yes. Mobile phone and tablet vendors are sensitive to the battery life and computing performance of their products. This is improved by higher performing lower power DRAM.

For Servers Moderately Favorable

2 Yes. Servers are required to speedily work with large amounts of data and low instances of failure. DRAM memory with low-latency and reliability (quality) are important for servers.

For PCs & Notebooks Unfavorable 5 PC vendors have adopted increasingly higher-bandwidth DRAM memory products (DDR3) in windows 7 and windows 8 operating systems.

For Specialty Applications Favorable 1 Similar to servers, the specialty applications require DRAM that operates at wider temperature ranges enabling their products to be also supported in these ranges as well.

Net Effect: Moderately 2.65 1 Overall, the DRAM product improves the industry

81

Favorable product in most applications except for mainstream PC and notebooks.

Does the industry’s product affect the buyer’s other costs?

For Tablets & Smartphones Moderately Favorable

2 Lower DRAM power consumption can enable tablet and smart phone vendors to purchase cheaper batteries.

For Servers Moderately Favorable

2 More reliable DRAM will lower the costs of product down-time to replace failed DRAM. Lower power consumption will lower the overall utility bill for server farms.

For PCs & Notebooks Unfavorable 5 No significant cost improvement. For Specialty Applications Moderately

Favorable 2 Support of specialty DRAM over long periods reduces the

vendor cost to stock high volumes of DRAM. Net Effect: Moderately

Favorable 2.8 3 DRAM slightly affects buyers other costs except for

mainstream PC and notebooks.

Supplier Power [Score 5.0 – Unfavorable]

Factors Affecting Suppliers’ Bargaining Power

Effect Strength Rank Reasoning

Concentration Ratio for each Supplier Group

Unfavorable 5 1 The three major semiconductor equipment categories are all high concentrated – Lithography (24%), Deposition (22%), Dry Etch (12%). The DRAM industry accounts for 11.6% of total semiconductor equipment purchases.

Strategic Importance of the industry to the supplier group

Moderately Favorable

2 2 In 2012, DRAM CAPEX spending was $7B of the total $60B spent across all semiconductor buyers. With 11.6% share, the DRAM industry is not prioritized over others.

Switching Costs

Unfavorable 4.5 1 Switching costs are high because machines and tools are highly specialized. ASML is the only provider of 32nm and smaller photo lithography equipment enabling this technology node. They are the only vendor capable of providing EUV (extreme ultraviolet) equipment enabling the future 15nm node. (Lapedus, 2012).

Are the Supplier Group’s products/services differentiated?

Unfavorable 5 2 Due to the high fixed (R&D) costs of creating cutting-edge technology, most equipment vendors can only afford 1-2x types of equipment that must capture large market share within its category.

Are there substitutes for the Supplier Group’s products/services?

Unfavorable 5 1 The high cost of developing new DRAM processes and high concentration within the DRAM industry has led the industry to focus on a single type of wafer production.

Do the Suppliers pose a credible forward integration threat?

Moderately Favorable

2 3 The technology and IP barriers for equipment suppliers to enter the manufacturing and marketing of semiconductors are too high, as mentioned above in BTE.

Threat of Substitutes [Score 2 – Moderately Unfavorable]

Factors Affecting Threat of Substitutes

Effects Strength Rank Reasoning

Do buyers have high propensity to substitute?

Moderately Favorable

4 2 DRAM faces a long-term substitute in new types of high-speed non-volatile memory. Unlike DRAM, these devices type will retain their data when turned off. Resistive RAM (RRAM) is the most promising of these

82

technologies. Memory firms have begun to bring early versions of RRAM products to market in low volumes.

Is the price/performance of substitutes high?

Moderately Favorable

4 1 DRAM still outperforms RRAM memory in features/specs required by customers (low power, size/density, speed, and cost). For example, Micron’s version of RRAM (phase-change memory) provides non-volatile performance, but operates at slower speed and higher power at a more expensive (45 nm) technology node.

Complementors’ Power [Score 4 – Moderately Unfavorable]

Factors Affecting Complementors’ Power

Effects on Industry

Strength Rank Reasoning

Relative Concentration NAND Flash Moderately

Favorable 2.5 CR4=79% (Samsung, Toshiba, Sandisk, Hynix)

Computer CPUs Moderately Favorable

2.5 CR4=67% (Intel, Qualcomm, Apple, Samsung)

Net Effect: Moderately Favorable

2.5 1 Relative of concentration of buyer side complements is less than CR4 of DRAM (91%)

Relative Buyer/Supplier Switching Costs

NAND Flash Moderately Favorable

1 NAND and DRAM use standardized interfaces, enabling low switching costs for both types of memory.

Computer CPUs Unfavorable 5 CPUs are highly differentiated, requiring complete product redesigns to switch.

Net Effect: Moderately Unfavorable

4 2 Bundles of CPUs pose high switching costs for buyers while NAND and DRAM comply with the same interface standards.

Ease of bundling NAND Flash Favorable 2 Multi-chip packaging (MCP) solutions are used to

sell low-profile high performance memory modules using both NAND and DRAM in the mobile and server markets. All PCs and computers require NAND or equivalent SSD/Hard-drives in their computers.

Computer CPUs Favorable 2 Electronic devices with a CPU are in general required to be used with DRAM products.

Net Effect: Favorable 2 1 High. NAND and CPUs are typically required to be bundled with DRAM.

Differences in pull through NAND Flash Moderately

Unfavorable 4 NAND memory in general determines the amount of

DRAM required to interface with it. Computer CPUs Unfavorable 5 CPU power and capabilities generally determine the

type and amount of DRAM that must be used with it. Net Effect: Moderately

Unfavorable 4.5 1 Both CPU’s and NAND determine the amount and

type of DRAM required to be bundled with an electronic device.

Threat of vertical integration NAND Flash Moderately

Unfavorable 4.5 NAND firms in general possess the semiconductor

equipment and know-how to build DRAM devices. Computer CPUs Moderately

Unfavorable 4.5 CPU firms also possess the equipment and know-

how to design DRAM devices.

83

Net Effect: Moderately Unfavorable

4.5 1 Unfavorable for DRAM suppliers given that NAND and CPU firms have low barriers to entry into the DRAM market.

Rate of growth of the value pie NAND Flash Favorable 5 Demand for NAND and DRAM memory is steadily

increasing both with demand for consumer electronics and the data storage and bandwidth.

Computer CPUs Favorable 5 Purchases of consumer electronics (servers, PCs, mobile devices) has gradually increased, greatly raising the demand for computing devices and their performance.

Net Effect: Favorable 5 2 Favorable growth in the value pie as a result of increasing demand in servers and mobile devices as a result of the “Great IT Shift”.

84

Exhibit 3: DRAM Capacity as a Key Revenue Driver

Source: (Nomura Equity Research, 2011; Nomura Equity Research, 2012)

Exhibit 4: Cost Leadership – Samsung Leading the Pack

Source: (Nomura Equity Research, 2011; Nomura Equity Research, 2012; Pajjuri, Heller, & Goodman, 2012)

0% 10% 20% 30% 40% 50%

Samsung

Hynix

Elpida

Micron

Nanya

% Revenues

% Cap

$2.41

$1.71

$1.21

$0.86

$1.50 $1.17

$0.50

$1.05

$0.60

$0.40

$1.00

$0.70

$1.80

$1.00

$0.70

$0.30

$0.10

$0.20

$0.40

$0.80

$1.60

2008 2009 2010 2011 2012 2013

ASP Micron Samsung Hynix Elpida Expon. (ASP)

DRAM ASP Curve

Optimum standard margin based on ASP and process capabilities 65nm Process @

$1.80 /GB

58nm Process @ $1.50 /GB

45-48nm Process @ $1 - $1.17 /GB

32-38nm Process @ $0.5 - $0.7 /GB

25-29nm Process @ $0.3 - $0.5 /GB

Samsung achieves lowest cost process 1-1.5 years ahead of competition

Elpida closes cost leadership by ~6months.

85

Exhibit 5: “The Great IT Shift” – Smartphones and Tablets Overtake Desktops and Notebooks

Source: (Nomura Equity Research, 2012)

Exhibit 6: Growth and Drivers for Global Data Traffic Measured in Exabytes

Source: (CISCO, 2012)

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2010 2011 2012 2013

Desktops

Notebooks

Smart Phone

Tablets

k

20k

40k

60k

80k

100k

120k

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012(F)

2013(F)

2014(F)

2015(F)

2016(F)

Social Networking

Mobile Devices Streaming Video

86

Exhibit 7: VRIO Analysis

Samsung

Resource or capability Elaboration Valuable Scarce/Rare?

Difficult to imitate? Exploited by the firm?

Competitive Implications

Equity in Equipment Suppliers

Samsung owns equity shares in key semiconductor equipment suppliers, enabling accelerated equipment development and manufacturing needed for the next technology nodes.

Yes Yes Yes Unique historical conditions - path dependence. None of the other DRAM suppliers possess large cash reserves sufficient to support equity investment in suppliers.

Yes Sustainable competitive advantage

Vertical Integration 1. Guaranteed demand 2. More accurate market forecast info 3. Design feedback from consumer electronics designers 4. First entrant (see Exhibit 40 for a discussion of the Stackelberg model)

Yes Yes Yes Unique historical conditions - path dependence. Significant investment and engineering know-how needed.

Yes Sustainable competitive advantage

Ability to take advantage of a positive feedback loop

Cash put into leading technology => rapid learning process => cost advantage, first to get to market => capture higher margins => higher profitability => more cash

Yes Yes Yes Causal Ambiguity. Samsung's investment system to continuously re-invest operational cash-flow maintains leading-edge technology processes.

Yes Sustainable competitive advantage

Hynix

Resource or capability Elaboration Valuable Scarce/Rare?

Difficult to imitate? Exploited by the firm?

Competitive Implications

Presence in China Hynix directed sales and marketing efforts to smartphone manufacturers in China and currently has strong relationships there

Yes Yes No Yes Temporary competitive advantage

Elpida

Resource or capability Elaboration Valuable Scarce/Rare?

Difficult to imitate? Exploited by the firm?

Competitive Implications

Process Design Capabilities

Ability to design and ramp new technology nodes quickly, a strong engineering team

Yes Yes Yes Causal ambiguity. Elpida consistently demonstrates having higher quality & faster time-to-market DRAM products.

Yes Sustainable competitive advantage

87

Product Design Capabilities

Ability to design cutting-edge DRAM product portfolio

Yes No Yes Parity

Customer Relationship

1, Apple supplier for iPad and iPhone 2, Customized testing facilities

Yes No Yes Temporary Competitive Advantage

Most of fabs and R&D centers located in Japan

High employee retention Yes No Yes Parity

Micron

Resource or capability Elaboration Valuable Scarce/Rare?

Difficult to imitate? Exploited by the firm?

Competitive Implications

Ownership of HQ and facilities in Boise, Idaho

Retaining valuable employees over long-periods of time due to lack of employment alternatives in semiconductors in Boise

Yes Yes No Yes Temporary Competitive Advantage

Experience in M&A Ability to merge acquired companies efficiently into Micron's corp.

Yes No Yes Parity

Know how for older products

Ability to support older memory products over long periods of time.

Yes Yes Yes - Unique historical conditions. Employees' expertise in legacy products will be rare. - Social complexity. Difficult to maintain except if company & location fosters a culture where employees stay in the company for long periods of time.

Yes Sustainable Competitive Advantage

Older fabs in good operating conditions, not converted to newer technologies

To serve the longevity program Yes Yes Yes Path dependence. Choice to maintain an out-of-date facility.

Yes Sustainable Competitive Advantage

Resell channel of other manufacturers' DRAM

Micron can take advantage of temporary low DRAM prices to profit from DRAM ASP volatility.

Yes No Yes Parity

88

Exhibit 8: Value Drivers and Value Estimations

This exhibit lists the value drivers in the DRAM industry based on analysts’ reports and interviews conducted

with Micron employees. For each DRAM segment, we gave a different weight to each driver, with 5

representing the most important driver and 1 representing the least important one. We then gave a score to

each competitor on its performance in a specific driver for a specific segment. A performance score of 3

represents no advantage or disadvantage compared to other competitors. A score of 5 represents excellent

performance.

PC & Notebook Weight Performance (1 lowest to 5 highest)

(1-5) Micron Elpida Hynix Samsung

Quality (% defects, MTTF) 3 3 3 3 3

Power (mW) 3 3 3 3 3

Size (mm^2) - Smaller is better 2 3 3 3 3

Speed (MHz) 5 3 3 3 3

Time Delay (Latency) 3 3 3 3 3

Operating Temperature Range 3 3 3 3 3

Guaranteed Capacity 1 3 3 4 2

Longevity (Long product life cycle) 1 3 3 3 3

Bundling Capability 1 3 3 3 3

Brand Recognition 2 3 3 3 3

Depth of Line (Types of memory) 2 3 3 3 3

Total N/A 3.00 3.00 3.04 2.96

% Value change relative to Micron N/A N/A 100% 101% 99%

Mobile Weight Performance (1 lowest to 5 highest)

(1-5) Micron Elpida Hynix Samsung

Quality (% defects, MTTF) 3.5 3 5 3 3

Power (mW) 5 2 4 4 4

Size (mm^2) - Smaller is better 4.5 2 4 4 4

Speed (MHz) 5 2 5 4 4

Time Delay (Latency) 3 3 3 3 3

Operating Temperature Range 3 3 3 3 3

Guaranteed Capacity 5 2 4 4 2.5

Longevity - long product life cycle 1 3 3 3 3

Bundling Capability 4 2 4 5 5

Brand Recognition 4.5 2 5 4 4

Depth of Line (types of memory) 1 2 3 3 3

Total N/A 2.27 4.13 3.81 3.62

% Value change relative to Micron N/A N/A 182% 168% 160%

Server Weight Performance (1 lowest to 5 highest)

89

(1-5) Micron Elpida Hynix Samsung

Quality (% defects, MTTF) 5 4 0 3 3

Power (mW) 3 4 0 4 4

Size (mm^2) - Smaller is better 3 3 0 3 3

Speed (MHz) 5 3 0 3 3

Time Delay (Latency) 5 5 0 3 3

Operating Temperature Range 4 3 0 3 3

Guaranteed Capacity 3 4 0 3 2

Longevity (Long product life cycle) 2 3 0 3 3

Bundling Capability 1 4 0 3 3

Brand Recognition 4 5 0 3 4

Depth of Line (Types of memory) 3 5 0 3 3

Total N/A 3.95 0.00 3.08 3.11

% Value change relative to Micron N/A N/A 0% 78% 79%

Specialty Weight Performance (1 lowest to 5 highest)

(1-5) Micron Elpida Hynix Samsung

Quality (% defects, MTTF) 3 5 4 3 3

Power (mW) 1 3 3 3 3

Size (mm^2) - Smaller is better 1 3 3 3 3

Speed (MHz) 2 3 3 3 3

Time Delay (Latency) 1 3 3 3 3

Operating Temperature Range 5 5 3 3 3

Guaranteed Capacity 5 5 1 1 1

Longevity (Long product life cycle) 5 5 1 1 1

Bundling Capability 1 3 3 3 3

Brand recognition 1 5 3 3 3

Depth of Line (Types of memory) 1 3 3 3 3

Total N/A 4.46 2.35 2.23 2.23

% Value change relative to Micron N/A N/A 53% 50% 50%

Exhibit 9: Values, Costs and Prices

The table below was used to determine the cost for each competitor (Nomura Equity Research, 2011; Nomura

Equity Research, 2012):

Micron Elpida Hynix Samsung

Tech Node Cost/GB Tech Node Cost/GB Tech Node Cost/GB Tech Node Cost/GB

34nm $0.60 32nm $0.51 39nm $0.70 29nm $0.40

34nm $0.60 45nm $1.00 48nm $1.17 35nm $0.60

48nm $1.17 45nm $1.00 48nm $1.17 35nm $0.60

90

48nm $1.17 45nm $1.00 48nm $1.17 35nm $0.60

The table below was used to determine prices (Nomura Equity Research, 2011):

Segment ASP Multiplier Price

Mobile 2.5 $2.25

Server 2 $1.80

Specialty 1.5 $1.35

PC/Notebook 1 $0.90

Value Minus Cost Analysis

91

Exhibit 10: Primary Competitors Financial Ratios

Source: Companies’ Financial Reports

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2007 2008 2009 2010 2011

Gross Margin

SAMSUNG

HYNIX

ELPIDA

MICRON

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

2007 2008 2009 2010 2011

Profit Margin

SAMSUNG

HYNIX

ELPIDA

MICRON

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

2007 2008 2009 2010 2011

Return on Assets

SAMSUNG

HYNIX

ELPIDA

MICRON

92

-1.00

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

2007 2008 2009 2010 2011

Return on Equity

SAMSUNG

HYNIX

ELPIDA

MICRON

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2007 2008 2009 2010 2011

Current Ratio

SAMSUNG

HYNIX

ELPIDA

MICRON

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2007 2008 2009 2010 2011

Quick Ratio

SAMSUNG

HYNIX

ELPIDA

MICRON

93

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2007 2008 2009 2010 2011

Debt-Equity Ratio

SAMSUNG

HYNIX

ELPIDA

MICRON

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

2007 2008 2009 2010 2011

Inventory Turnover

SAMSUNG

HYNIX

ELPIDA

MICRON

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2007 2008 2009 2010 2011

Asset Turnover

SAMSUNG

HYNIX

ELPIDA

MICRON

94

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2007 2008 2009 2010 2011

Days Sales Outstanding

SAMSUNG

HYNIX

ELPIDA

MICRON

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

2007 2008 2009 2010 2011

R&D as % of Sales

SAMSUNG

HYNIX

ELPIDA

MICRON

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2007 2008 2009 2010 2011

Capex Spending as % of Sales

SAMSUNG

HYNIX

ELPIDA

MICRON

95

Exhibit 11: Analysis of Acquisitions

Displaytech

Micron acquired Displaytech in May 2009 as part of its ongoing attempts to diversify the company’s portfolio outside the core memory business. Dimension of Analysis Recommended

strategy

Type of synergies Modular. The technology and manufacturing of microdisplays are different than those for memory, and are actually closer to CMOS imaging. The companies expected some synergies on R&D.

Nonequity alliance

Types of resources

A combination of hard resources and soft resources. Micron acquired Displaytech mostly for the technology, for diversification purposes.

Acquisition or equity alliance

Market conditions

The market for microdisplays and pico-projectors (the expected direction of growth for this technology) was highly uncertain. Demand was not picking up and industry insiders hoped the acquisition itself would increase customer’s confidence in the technology. The biggest player in this space among the large semiconductor companies was Texas Instruments.

Nonequity or equity alliance

Conclusion: Combining all factors, Micron’s recommended strategy in this case would be an equity alliance.

Numonyx

In February 2010, Micron acquired Numonyx B.V., a privately held flash-type memory chips maker that was founded in 2008 by Intel, STMicroelectronics, and Francisco Partners.

Dimension of Analysis Recommended Strategy

Type of synergies Reciprocal. With the Numonyx acquisition, Micron enhanced its NAND capabilities and inherited NOR capabilities. Both are core products for Micron’s memory businesses and the company expected a high level of integration.

Acquisition

Types of resources Both hard and soft resources. At the time of the acquisition, Numonyx had 6,400 employees and three fabs – two manufacturing fabs in Israel and Singapore and one R&D fab in Italy. Micron was expected, at the time of the acquisition, to eliminate redundant resources by reducing Numonyx’s overhead and headcount (LaPedus).

Acquisition

Market conditions At the time of the acquisition, demand for NOR products was uncertain, but NAND products already gained growth momentum. Rivalry in the NAND space was intense, as in the memory products in general. The main players were Samsung, Toshiba, SanDisk, and Hynix.

Acquisition

Conclusion: As seen from the analysis, acquisition was indeed the right strategy.

Exhibit 12: Analysis of Partnerships

96

Intel

In 2006 Intel and Micron formed a joint venture called IM Flash Technologies, LLC ("IMFT"), to manufacture NAND flash memory products for the two companies. The dimensions of analysis for this type of partnership do not fall neatly into the “Ally or Acquire” framework, but we will still use it as a basis for our analysis. Dimension of Analysis Recommended

Strategy

Type of synergies

Synergies in this case are reciprocal – both companies contribute resources and share the risk in developing and manufacturing a product that is new to both of them

Acquisition

Types of resources

Creating the joint venture would require a combination of hard and soft resources. Having a NAND operation in each company separately would be more costly and would create redundancy.

Acquisition

Market conditions

The market for NAND products was already picking up at that time and the joint venture was a way for both companies to enter into that market. Rivalry was always very high in the memory market

Acquisition

Although the recommendation of the “Acquire or Ally” framework is an acquisition, we have to take into account other factors: Both companies did not have a NAND operation at that time. Intel was not interested in entering the memory market, which it exited back in the 1980s.

However, it had a business interest in keeping products that are complementary to logic chips (e.g. memory chips) technologically advanced and in vast supply.

There was no business rationale or resources for Micron to acquire Intel. The resources needed to start a memory operation from scratch are prohibitively high. Sharing the

resources between the two companies allowed both of them entry into a new territory. Conclusion: The joint venture serves the interests of both companies well. It gives Intel a foothold in the memory business and it gives Micron the resources it needs to enter the NAND market.

97

Nanya

In 2011 Micron had two DRAM joint ventures with Nanya: Inotera and MeiYa. The rationale for the joint venture was similar to the one with Intel described above. Dimension of Analysis Recommended

Strategy

Type of synergies

Synergies in this case are reciprocal – both companies contribute resources and share the risk in developing and manufacturing a product that is new to both of them

Acquisition

Types of resources

Creating the joint venture would require a combination of hard and soft resources. Because both companies already have a DRAM operation, there will be much redundant resources.

Acquisition

Market conditions

The market for DRAM products was highly volatile with a high level of rivalry Acquisition

Other factors to consider: The part of the agreement with Nanya which is very valuable to Micron is the royalties that Nanya

pays for intellectual property that was shared as part of the joint venture agreement. Micron gains revenue this way with no production expenses.

Both companies are long timers in the DRAM business, but Nanya currently lags behind in technology and performance.

Conclusion: In this case, the “Acquire or Ally” recommendation of acquisition may have worked better for Micron mainly because Nanya is a high risk partner.

98

Exhibit 13: BCG Matrix for Micron

Exhibit 14: Micron’s Value Chain

99

Exhibit 15: Elpida’s Organization Chart

Source: (Elpida Memory Inc., 2012)

Exhibit 16: Elpida’s Corporate Governance Bodies and Committees

Body/Committee Description and Role

Board of Directors Seven members (including an outside director) who make decisions regarding management issues and supervise the execution of the business.

Board of Corporate Auditors

Four members (including two outside auditors) who audit the duties executed by directors and scrutinize the company’s overall operations, systems and assets.

Officers Meeting Thirteen members (including directors involved in operations) who meet once per week to decide important business operations matters.

Executive Compensation Advisory Committee

Five members selected by the Board of Directors who decide the allocation of remuneration for directors and auditors.

Risk Management and Compliance Committee

Decides and manage policies that concern risk management and compliance systems for the entire company

Audit Office Six members who ensure the full implementation of internal controls as it relates to the company’s plans and financial reports.

Source: (Elpida Memory Inc., 2012)

CEO

Audit Office Finance &

Accounting Office

Administration & Management

Office

Sales & Marketing Office

Quality Assurance Office

Technology Development

Office

New Memory Development

Group

DRAM Business Unit

Mobile Division Computing

Division Specialty Division

Planning Department

Hiroshima Plant

100

Exhibit 17: Elpida’s Value Chain

Exhibit 18: Ally or Acquire Framework for Elpida’s Acquisition

Dimension of Analysis Recommended strategy

Type of synergies Reciprocal Elpida is making products that are similar to Micron’s. The companies will benefit from combining resources and capabilities by ways of better efficiency and economies of scope.

Acquisition

Types of resources

Both hard and soft resources. Most of the resources are not considered redundant.

Acquisition or Equity Alliance

Market conditions

Market uncertainty is expected to be relatively low. The industry expects one of the players to acquire Elpida and will not resent the move. In addition, further consolidation is expected to contribute to market stabilization.

Acquisition

Conclusion: Combining all factors, Micron’s recommended strategy in this case would be an acquisition.

101

Exhibit 19: Combined Company’s Value Minus Cost

102

Exhibit 20: Combined Company’s VRIO Analysis

Resource or capability Elaboration Valuable Scarce/Rare?

Difficult to imitate? Exploited by the firm?

Competitive Implications

DRAM R&D centers located in Japan (Asia)

Skilled and experienced employee base located in Asia

Yes No Yes Parity

Full or partial ownership of DRAM factories in Taiwan.

Through control of DRAM supply, Micron has increased control on market pricing and holds greater market share.

Yes No Yes Parity

Customer relationships in Mobile market

Elpida has developed strong relationships and brand in the mobile market place as the sole supplier to Apple’s iPad and iPhone.

Yes Yes No Yes Temporary Competitive Advantage

Bundling capabilities Subsidiary (Akita) possesses leading small form-factor multi-chip packaging technology

Yes No Yes Parity

Mobile DRAM product design

Through Elpida, Micron has designed competitive mobile DRAM products.

Yes No Yes Parity

Leading NAND and DRAM manufacturing capabilities

Micron owns and operates NAND and DRAM facilities with competitive low-power small-form factor design rules.

Yes No Yes Parity

Environmentally friendly DRAM manufacturing capabilities

Owns environmentally friendly gas-powered electrical systems and waste recycling systems.

Yes No Yes Parity

103

IX. FINANCIAL BACKGROUND APPENDIX

Exhibit 21: Profitability Ratios – Industry Average versus Micron

Source: Companies’ Financial Reports

Exhibit 22: CapEx and R&D Expenditures – Industry Average versus Micron

Source: Companies’ Financial Reports

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Operating Margin Profit Margin Return on Assets Return on Equity

5 Year Average (2007-2011)

Micron

Industry

0.0%

20.0%

40.0%

60.0%

80.0%

2007 2008 2009 2010 2011

CapEx as % of Sales

Micron Industry

0.0%

5.0%

10.0%

15.0%

2007 2008 2009 2010 2011

R&D as % of Sales

Micron Industry

104

Exhibit 23: Micron’s Standalone Valuation

Assumptions

Revenue 4%

COGS 79%

SG&A 8%

R&D 11%

Other Operating Income Expense, Net 0%

Depreciation & Amortization 30%

CapEx 28%

Change in Net Working Capital -

Restructure 0%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Terminal

Base Year 4% 4% 4% 4% 4% 4% 4.05% 4.15% 4.25% 4.35% 4.45%

Revenue 8,234 8,563 8,906 9,262 9,633 10,018 10,419 10,841 11,290 11,770 12,282

COGS 6,464 6,722 6,991

7,271 7,562 7,864 8,179 8,510 8,863 9,240 9,642

Gross Margin

1,770

1,841

1,915 1,991

2,071

2,154

2,240

2,331

2,427

2,531

2,641

SG&A Expenses 620 685 712 741 771 801 833 867 903 942 983

R&D 918 942 980 1,019 1,060 1,102 1,146 1,192 1,242 1,295 1,351

Restructure - - - - - - - - - - -

Other Operating Expenses - - - - - - - - - - -

Operating Income (Loss) Before Taxes (EBIT) 232 214 223 232 241 250 260 271 282 294 307

Net Income (Loss) After Taxes 193 178 185 192 200 208 216 225 234 244 255

+ Depreciation & Amortization 2,222

2,569

2,672

2,779

2,890

3,005

3,126

3,252

3,387

3,531

3,685

- CapEx 1,699

2,398

2,494

2,593

2,697

2,805

2,917

3,035

3,161

3,296

3,439

- Change in Net Working Capital 92 96 100 103 108 112 116 121 126 132 137

Free Cash Flow 624 253 263 274 285 296 308 321 334 348 363 8,590

WACC 8.87%

Discount Factor 1.000

0.919 0.844 0.775 0.712 0.654 0.601 0.552 0.507 0.466 0.428

0.428

PV - 233 222 212 203 194 185 177 169 162 155 3,673

Sum of PV 1,912

PV of Terminal Value 3,673

Enterprise Value 5,585

105

Exhibit 24: Micron’s Growth Forecast

To project Micron’s future revenue growth, we calculated a weighted average of Micron’s historical data (Part 1 below), growth predictions for Micron’s key markets NAND and DRAM (Part 2), and nominal GDP (Part 3).

Part 1: Historical Revenue Growth

Year 2012 2011 2010 2009 2008 2007 2006 2005 Average

Revenue (in $M) 8,234 8,788 8,482 4,803 5,841 5,688 5,272 4,880 N/A

Growth N/A -6.3% 3.6% 76.6% -17.8% 2.7% 7.9% 8.0% 3.2%

Note: Due to financial crisis, revenue changes for years 2008 and 2009 were not included in the calculation.

Historical Revenue Growth = 3.2%

Part 2: Growth Estimate by Segment

NAND DRAM Average

Growth forecasts until 2016 16.6% 9.6% N/A

Revenue % contribution by segment

60% 40% N/A

Adjusted growth for Micron 10.0% 3.6% 4.6%

Notes: Only NAND and DRAM were considered for the growth estimate by segment as those markets are

expected to be the key revenue drivers for Micron. Growth forecasts until 2016 based on analysts’ estimations (Manners, 2012)

Growth Prospects for NAND and DRAM = 4.9%

Part 3: Nominal GDP Growth

Nominal GDP growth was calculated by averaging the GDP growth rate forecasts for the coming 5 years as published by the International Monetary Fund (International Monetary Fund, 2012). Nominal GDP Growth = 4.45%

Micron’s Revenue Growth for Next 10 Years: 4.0%

Growth = 0.5 * 3.2% + 0.3 * 4.9% + 0.2 * 4.45% = 4.0%

The assumed weights for revenue growth calculation are as follows: 50% for historical company revenue growth; 30% for growth prospects of NAND and DRAM; and 20% for expected Nominal GDP growth forecast.

106

Exhibit 25: Micron’s Growth Forecast for FCF Components

The value of each FCF components is based on Micron’s historical data and represents the average of the component value as a percentage of revenue for the period from 2005 to 2012.

Year 2005 2006 2007 2008 2009 2010 2011 2012 Average

Revenue 4,880 5,272 5,688 5,841 4,803 8,482 8,788 8,234 -

CapEx 1,065 1,365 3,600 2,529 488 616 2,550 1,699 -

22% 26% 63% 43% 10% 7% 29% 21% 28%

Depr & Amortization 1,265 1,281 1,718 2,060 2,186 2,005 2,162 2,222 -

26% 24% 30% 35% 46% 24% 25% 27% 30%

Other oper, (income) expense, net

22.3 266 76 91 -107 11 359 -42 -

0.46% 5.05% 1.34% 1.56% -2.23% 0.20% 4.09% -0.51% 1.24%

SG&A 348.3 460 610 455 354 528 592 620 -

7% 9% 11% 8% 7% 6% 7% 8% 8%

R&D 603.7 656 805 680 647 624 791 918 -

12% 12% 12% 12% 13% 7% 9% 11% 11%

COGS 3,734 4,072 4,610 5,896 5,243 5,768 7,030 7,266 -

77% 77% 81% 101% 109% 68% 80% 88% 78.51%

Restructure 1 0 19 33 70 -10 -21 7 -

0.02% 0% 0.33% 0.56% 1.46% -0.12% -0.24% 0.09% 0.26%

Change in Net Working Capital

Year 2005 2006 2007 2008 2009 2010 2011 2012 Average

Accounts Receivable 1,265 1,281 1,718 2,060 2,186 2,005 2,162 2,222 -

N/A 161.6 38 38 -234 733 -34 -208 71

Inventory 771.5 963 1,532 1,291 987 1,770 2,080 1,812 -

N/A 191.5 569 -241 -304 783 310 -268 149

Accounts Payable 752.5 1,319 1,385 1,111 1,037 1,509 1,830 1,641 -

N/A 567 66 -274 -74 472 321 -189 127

Net Working Capital 813.4 600 1,141 1,212 748 1,792 1,747 1,460 -

Change in NWC N/A -213 541 71 -464 1,044 -45 -287 92

107

Exhibit 26: Micron’s WACC Calculation

Part 1: Cost of Equity

Capital Asset Pricing Model (CAPM) is used to calculate Cost of Equity for Micron: Re = Rf +*Rm

Assumed: Risk Free Rate (Rf) is 10-year Treasury note as of 08/30/2102 = 1.86%. Source: (US

Department of the Treasury, 2012) Market risk premium (Rm) = 6.01% Source: (Damodaran, 2012) Beta () = 1.77 (see calculation below)

Beta () calculation:

Source Beta

Google Finance 1.3

NASDAQ 2.11

Macroaxis 1.75

Yahoo Finance 1.78

Median Beta 1.77

Cost of Equity (Re ) = Rf +*Rm = 1.86% + 1.77 * 6.01% Cost of Equity (Re) = 12.5%

Part 2: Cost of Debt

According to Moody’s and Standard & Poor, Micron’s credit rating is Ba3 and BB respectively. The spread between BB- rated bonds and 10-year US Treasuries is used to estimate the risk premium (the excess beyond the risk free rate).

Corporate Bonds Spreads (Bonds Online, 2012):

Rating 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 30 yr

Aaa/AAA 15 20 50 35 85 50 70

Aa1/AA+ 25 25 55 40 90 55 75

Aa2/AA 30 30 60 45 95 60 80

Aa3/AA- 35 35 65 50 100 65 85

A1/A+ 45 45 70 60 105 80 100

A2/A 55 60 75 70 110 90 110

A3/A- 85 90 110 80 115 100 120

Baa1/BBB+ 100 120 120 125 170 140 150

Baa2/BBB 115 130 150 145 185 160 175

Baa3/BBB- 185 140 215 225 250 210 220

Ba1/BB+ 300 350 400 350 350 300 315

Ba2/BB 400 425 450 450 400 350 365

Ba3/BB- 450 500 475 475 425 375 385

108

B1/B+ 500 550 550 550 475 400 415

B2/B 600 625 700 650 525 575 475

B3/B- 650 675 750 675 650 625 500

Caa/CCC+ 725 750 775 800 825 775 750

US Treasury Yield 0.28 0.52 0.77 1.51 2.19 2.84 4.16

Assumed:

Risk Free Rate (Rf) is 10-year Treasury note as of 08/30/2102 = 1.86% Source: (US Department of the Treasury, 2012)

Spread (Ba3 v Rf) = 3.75 (from table above)

Effective Tax Rate = 17% Source: (Micron, 2011)

Cost of Debt (Rd) Tax Adjusted = (Rf + Spread) * (1 – Tax Rate) = (1.86% + 3.75) * (1 – 17%) Cost of Debt (Rd) Tax Adjusted = 4.66%

Part 3: Cost of Capital (WACC)

Micron’s weighted average cost of debt is determined using equation: WACC = (E/V)*Re +

(D/V)*Rd

Description Value

Total Shares Outstanding (TSO, as of 08/30/2012) 991.20

Stock Price (08/30/2012) 6.18

Market Value of Company Equity (E) = TSO * Stock Price 6,126

Market Value of Company Debt (D) 5,281

Total Capital Invested (V) = E + D 11,407

WACC = (6,126/11,407)* 12.33 + (5,281/11,408)* 4.47 WACC = 8.87

109

Exhibit 27: Profitability Ratios – Industry Average versus Elpida

Source: Companies’ Financial Reports

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Gross Margin Profit Margin Return on Assets Return on Equity

5 Year Average (2007-2011)

Elpida

Industry

110

Exhibit 28: Elpida’s Standalone Valuation

Assumptions

Revenue 3.3%

COGS 83.5%

SG&A 12%

R&D 2%

Other Operating Income Expense, Net 0%

Depreciation & Amortization 11%

CapEx 25%

Change in Net Working Capital -

Restructure 39%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Terminal

Base Year 3.3% 3.3% 3.3% 3.3% 3.3% 3.5% 3.7% 3.9% 4.1% 4.3% 4.45%

Revenue 3,696 3,818 3,944 4,074 4,209 4,347 4,500 4,666 4,848 5,047 5,264

COGS 3,087 3,188 3,293 3,402 3,514 3,630 3,757 3,896 4,048 4,214 4,395

Gross Margin 609 630 651 672 694 717 742 770 800 833 869

SG&A Expenses 44 458 473 489 505 522 540 560 582 606 632

R&D 74 76 79 81 84 87 90 93 97 101 105

Operating Income (Loss) Before Taxes (EBIT) 91 95 99 102 105 109 112 117 121 126 132

Net Income (Loss) After Taxes 55 58 60 62 64 66 69 71 74 77 80

+ Depreciation & Amortization 399 412 426 440 455 470 486 504 524 545 568

- CapEx 924 954 986 1,019 1,052 1,087 1,125 1,167 1,212 1,262 1,316

- Change in Net Working Capital 30 31 32 33 34 35 37 38 39 41 43

Free Cash Flow -500 -515 -532 -550 -568 -586 -607 -629 -654 -681 -710 -7,811

WACC 14%

Discount Factor 1 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.270

PV -452 -409 -371 -336 -305 -277 -252 -229 -209 -192 -2,107

Sum of PV -3,031

PV of Terminal Value -2,107

Enterprise Value -5,138

111

Exhibit 29: Elpida’s Growth Forecast

To project Elpida’s’s future revenue growth, we calculated a weighted average of Micron’s historical data (Part 1 below), growth predictions for the DRAM memory market(Part 2), and nominal GDP (Part 3). Part 1: Historical Revenue Growth

2012 2011 2010 2009 2008 2007 2006

N/A 2,648 5,631 4,796 3,077 3,309 3,999

N/A -53% 17% 56% -7% -17% -

Note: Because the 2008 financial crisis's impact was not significant for Elpida, we accounted 2009 and 2008 in the historical average revenue growth

Historical Revenue Growth = -1%

Part 2: Growth Estimate for DRAM

Growth Estimate for DRAM = 9.6% Source: (Manners, 2012)

Part 3: Nominal GDP Growth

Nominal GDP growth was calculated by averaging the GDP growth rate forecasts for the coming 5 years as published by the International Monetary Fund (International Monetary Fund, 2012). Nominal GDP Growth = 4.45%

Elpida’s Revenue Growth for Next 10 Years: 3.37%

Growth = 0.5 * (-1.0%) + 0.3 * 9.6% + 0.2 * 4.45% = 3.37%

The assumed weights for revenue growth calculation are as follows: 50% for historical company revenue growth; 30% for growth prospects of DRAM; and 20% for expected Nominal GDP growth forecast.

112

Exhibit 30: Elpida’s Growth Forecast for FCF Components

The value of each FCF components is based on Micron’s historical data and represents the average of the component value as a percentage of revenue for the period from 2007 to 2011.

Year 2007 2008 2009 2010 2011 Average

Revenue 3,309 3,077 4,796 5,631 2,648 -

CapEx 873 1,487 1,183 998 503 -

26% 48% 25% 18% 19% 27%

Depr & Amortization 790 899 994 1,089 1,167 -

24% 29% 21% 19% 44% 27%

SG&A 401 457 505 538 593 -

12% 15% 11% 10% 22% 12%

R&D 58 68 137 105 41 -

2% 2% 3% 2% 2% 2%

COGS 3,037 3,877 3,882 4,520 3,169 -

92% 126% 81% 80% 120% 99.73%

Change in Net Working Capital

Year 2007 2008 2009 2010 2011 Average

Accounts Receivable 566.7 501 1259.4 827 413 -

-389 -66 759 -433 -414 -109

Inventory 607 614 747.9 793 935 -

-356 7 134 46 142 -6

Accounts Payable 459 449 550 593 598 -

-860 -10 101 43 5 -144

Net Working Capital 714 666 1,457 1,027 750 -

Change in Net Working Capital

114 -49 792 -430 -277 30

Exhibit 31: Sensitivity / Regression Analysis for Elpida’s Standalone Valuation

113

Regression analysis perturbs all the input variables and looks for the most statistically significant drivers of the target (Elpida’s standalone valuation). The plots below show the regression model coefficient and the variability explained by each independent variable in descending order of significance. These drivers are the variables that Elpida needed to improve as a standalone entity to improve its valuation. Independent variables (affecting the firm valuation, cell B42) in descending order from most significant to least were1:

COGS/Revenue for 10 yrs: B3 CAPEX/Revenue for 10 yrs: B8 WACC2 for Elpida (14%): B35 Depreciation & Amortization /

Revenue for 10 yrs (10.8%): B7 SG&A/Revenue for 10 yrs

(12%): B4 R&D/Revenue for 10 yrs (2%):

B5 Revenue growth % (3.3%): B2 Tax rate for Elpida (39.1%):

B10 Change in net working capital

(0.81%): B9 We can see that the valuation (even without the debt and with much lower depreciation and amortization) is deeply in the red, mainly due to its high COGS/Revenue and high CapEx/Revenue ratios. It is not a revenue growth problem. Elpida’s high CapEx (fixed costs) were not covered by their slim gross margins, and after subtracting other fixed costs, it kept their FCF in the red. Acquisition by a bigger company in a better financial position and with economies of scale can help improve COGS and reduce CapEx to what can be recovered from future gross margins. Notes:

1 Only first three variables above are statistically significant 2 A WACC increase affects Elpida’s valuation positively due to faster discounting of its negative cash

flows. This would change once FCF gets positive.

114

Exhibit 32: “Most Likely” Synergies from Elpida’s Acquisition

Synergy Reasoning

Revenue A 1.5% improvement was identified through a change of product mix in favor of mobile DRAM, stabilized prices and a new offering that bundles Micron’s NAND products with Elpida’s DRAM products. The pricing improvements (pecuniary economies) are assumed given Micron’s increased control on DRAM supply, reducing the likelihood of oversupply, which lowers ASPs.

Cost of Goods

In the long-run, we expect a 2% reduction in product costs. We assume that Micron will absorb Elpida’s know-how, improving manufacturing processes throughout the company. In the near term, we believe that improvements in manufacturing overhead are achievable by replacing Elpida’s logistics and shipping activities with those of Micron’s, while manifesting an improved bargaining position when negotiating with suppliers.

SG&A A modest 5% reduction in SG&A is believed to be achievable by reviewing customers being serviced by both Micron’s and Elpida’s sales representatives. Sales channels also have to be examined for redundancies; however, in the short term, we assume that it would be best to leave most of Elpida’s sales force intact in order to minimize sales losses.

R&D Overall, we see a 10% reduction in R&D. We believe that it is important for Elpida’s R&D team to remain intact. Instead of layoffs, we suggest that Micron place increased emphasis on Elpida’s R&D team, while allowing its workforce to reduce through employee attrition and retirement. The 10% reduction is reasonable giving the industry’s attrition rate of 5%-10%.

CAPEX We see Micron’s purchase of Elpida reducing CAPEX expenses by $6 billion over a three year period accounting for assets (Hiroshima & RexChip facilities) gained through the acquisition.

Exhibit 33: Valuation of Synergies

Most Likely Case Scenario

Best Case Scenario

Worst Case Scenario

Combined Company (Micron + Elpida)

9.00 14.02 1.74

Synergies Value Estimation 6.60 11.62 -0.66

Notes:

Values are in billions of dollars. Synergy values are calculated by subtracting the standalone values for Micron and Elpida from their combined

values under the three scenarios.

115

Exhibit 34: Combined Valuation – Most Likely Case Scenario

Assumptions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Revenue Synergies 0% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

COGS Synergies 0% -2% -2% -2% -2% -2% -2% -2% -2% -2% -2%

SG&A Synergies 0% -5% -5% -5% -5% -5% -5% -5% -5% -5% -5%

R&D Synergies 0% -10% -10% -10% -10% -10% -10% -10% -10% -10% -10%

Other Operating Income Expense, Net Synergies

0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

CapEx Synergies 0% -50% -50% -50% 0% 0% 0% 0% 0% 0% 0%

Elpida-related Restructure Costs (in $M)

- $500 $250 - - - - - - - -

Tax Rate 23%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Terminal

Base Year 179 191 199 206 214 222 230 240 249 260 4.45%

Revenue 11,930 12,746 13,234 13,735 14,255 14,795 15,364 15,970 16,620 17,319 18,069

COGS 9,551 9,712 10,079 10,459 10,854 11,264 11,697 12,158 12,653 13,185 13,756

Gross Margin 2,379 3,034 3,155 3,276 3,401 3,530 3,667 3,812 3,967 4,134 4,313

SG&A Expenses 1,064 1,086 1,126 1,168 1,212 1,257 1,305 1,356 1,411 1,470 1,534

R&D 992 916 953 990 1,029 1,070 1,112 1,157 1,205 1,256 1,311

Restructure 0 500 250 0 0 0 0 0 0 0 0

Other Operating Expenses 91 95 99 102 105 109 112 117 121 126 132

Operating Income (Loss) Before Taxes (EBIT) 232 936 977 1,015 1,054 1,095 1,137 1,182 1,230 1,282 1,337

Net Income (Loss) After Taxes 179 721 753 782 812 843 876 910 947 987 1,030

+ Depreciation & Amortization 2,621 2,981 3,098 3,219 3,344 3,475 3,612 3,756 3,911 4,076 4,253

- CapEx 2,623 2,431 1,740 1,806 3,749 3,892 4,042 4,202 4,373 4,557 4,755

- Change in Net Working Capital 122 127 132 137 142 147 153 159 166 172 180

Free Cash Flow 55 1,144 1,979 2,058 265 279 292 305 319 333 348 8,219

WACC 8.9%

Discount Factor 1.000 0.919 0.844 0.775 0.712 0.654 0.601 0.552 0.507 0.465 0.427 0.427

PV - 1,670 1,595 189 182 175 169 162 155 149 3,513

Sum of PV 5,496

PV of Terminal Value 3,513

Enterprise Value 9,009

116

Exhibit 35: Combined Valuation – Best Case Scenario

Assumptions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Revenue Synergies 0% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%

COGS Synergies 0% -3% -3% -3% -3% -3% -3% -3% -3% -3% -3%

SG&A Synergies 0% -7% -7% -7% -7% -7% -7% -7% -7% -7% -7%

R&D Synergies 0% -15% -15% -15% -15% -15% -15% -15% -15% -15% -15%

Other Operating Income Expense, Net Synergies

0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

CapEx Synergies 0% -50% -50% -50% 0% 0% 0% 0% 0% 0% 0%

Elpida-related Restructure Costs (in $M)

- $550 $250 - - - - - - - -

Tax Rate 23%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Terminal

Base Year 239 257 267 277 288 299 310 323 336 350 4.45%

Revenue 11,930 12,868 13,364 13,870 14,395 14,941 15,515 16,127 16,784 17,489 18,247

COGS 9,551 9,613 9,976 10,352 10,743 11,149 11,578 12,034 12,524 13,050 13,616

Gross Margin 2,379 3,255 3,388 3,518 3,652 3,791 3,938 4,093 4,260 4,439 4,631

SG&A Expenses 1,064 1,063 1,103 1,144 1,186 1,231 1,277 1,327 1,381 1,439 1,501

R&D 992 866 900 935 972 1,011 1,051 1,093 1,138 1,186 1,238

Restructure 0 550 250 0 0 0 0 0 0 0 0

Other Operating Expenses 91 95 99 102 105 109 112 117 121 126 132

Operating Income (Loss) Before Taxes (EBIT) 232 1,230 1,287 1,337 1,388 1,441 1,497 1,556 1,620 1,688 1,760

Net Income (Loss) After Taxes 179 947 991 1,029 1,069 1,110 1,153 1,198 1,247 1,299 1,355

+ Depreciation & Amortization 2,621 2,981 3,098 3,219 3,344 3,475 3,612 3,756 3,911 4,076 4,253

- CapEx 2,623 2,431 1,740 1,806 3,749 3,892 4,042 4,202 4,373 4,557 4,755

- Change in Net Working Capital 122 127 132 137 142 147 153 159 166 172 180

Free Cash Flow 55 1,371 2,218 2,306 522 546 569 594 619 333 674 8,219

WACC 8.9%

Discount Factor 1.000 0.919 0.844 0.775 0,712 0.654 0.601 0.552 0.507 0.465 0.427 0.427

PV - 1,259 1,787 372 357 342 327 314 301 288 3,513

Sum of PV 7,217

PV of Terminal Value 6,805

Enterprise Value 14,022

Exhibit 36: Combined Valuation – Worst Case Scenario

117

Assumptions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Revenue Synergies 0% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

COGS Synergies 0% -1% -1% -1% -1% -1% -1% -1% -1% -1% -1%

SG&A Synergies 0% -3% -3% -3% -3% -3% -3% -3% -3% -3% -3%

R&D Synergies 0% -5% -5% -5% -5% -5% -5% -5% -5% -5% -5%

Other Operating Income Expense, Net Synergies

0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

CapEx Synergies 0% -50% -50% -50% 0% 0% 0% 0% 0% 0% 0%

Elpida-related Restructure Costs (in $M)

- $500 $250 - - - - - - - -

Tax Rate 17%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Terminal

Base Year 35.79 37.36 38.78 40.25 41.77 43.35 45.02 46.79 48.70 50.75 4.45%

Revenue 11,930 12,454 12,926 13,415 13,923 14,450 15,006 15,598 16,234 16,916 17,650

COGS 9,551 9,811 10,181 10,566 10,965 11,379 11,816 12,282 12,782 13,319 13,897

Gross Margin 2,379 2,643 2,744 2,849 2,958 3,071 3,190 3,316 3,452 3,597 3,753

SG&A Expenses 1,064 1,109 1,150 1,193 1,237 1,283 1,332 1,384 1,440 1,501 1,566

R&D 992 967 1,006 1,045 1,087 1,129 1,174 1,221 1,272 1,326 1,384

Restructure 0 500 250 0 0 0 0 0 0 0 0

Other Operating Expenses 91 95 99 102 105 112 112 117 121 126 132

Operating Income (Loss) Before Taxes (EBIT) 232 471 490 509 529 549 571 594 618 644 672

Net Income (Loss) After Taxes 193 391 407 422 439 456 474 493 513 535 558

+ Depreciation & Amortization 2,621 2,981 3,098 3,219 3,344 3,475 3,612 3,756 3,911 4,076 4,253

- CapEx 2,623 2,431 1,740 1,806 3,749 3,892 4,042 4,202 4,373 4,557 4,755

- Change in Net Working Capital 122 127 132 137 142 147 153 159 166 172 180

Free Cash Flow 69 815 1,633 1,699 -108 -108 -110 -112 -115 -119 -124 -2,930

WACC 8.9%

Discount Factor 1.000 0.919 0.844 0.775 0,712 0.654 0.601 0.552 0.507 0.465 0.427 0.427

PV - 748 1,378 -77 -71 -66 -62 -58 -55 -53 -1,252

Sum of PV 3,001

PV of Terminal Value -1,252

Enterprise Value 1,748

Exhibit 37: Sensitivity/Regression Analysis of the Combined Firm (Most Likely Case Scenario)

118

Independent variables (affecting the combined-firm valuation, cell B45) in descending order from the most significant to the least were:

WACC for the combined firm: B10 Revenue synergies for 10 yrs: C2 Tax rate for the combined firm: B9 CAPEX synergies for first 3 years only:

C8 COGS synergies for 10 yrs: C3 R&D synergies for 10 yrs: C5 SG&A synergies for 10 yrs: C4

These are the variables that Micron will need to execute on post-acquisition to maximize value created. Revenue and CapEx synergies are the most obvious, but the debt/equity structure of the firm needs to be optimized to minimize WACC in the current ultra-low interest rate environment. Taxes vs. variable costs need to be optimized jointly before deciding in which foundry to produce when capacity is not fully utilized. Full-fledged tax planning of production is beyond the scope of this paper.

Exhibit 38: Financial Effect of Short-Term Revision in Product Mix for Year 2013

If Micron keeps the current product mix (steady state from DCF in 2013)

If Micron changes product mix – an estimated 11% improvement in revenue based on today’s DRAM prices

% Change

Revenue 12,746 14,148 11%

COGS 9,712 9,712 0%

GM 3,034 4,436 46%

% GM 24% 31% 7%

EBIT 936 2,338 150%

Note: Revenue, COGS, Gross Margin and EBIT figures are in $M.

119

Exhibit 39: Financial Effect of Not Achieving the 15nm Technology Node by

2016

Micron builds an operational 15nm fab by 2016 (steady state from DCF)

Micron is not able to achieve the 15nm tech node

% Change

Revenue 14,255 14,255 0%

COGS 10,854 14,255 31%

GM 3,401 0 -100%

% GM 24% 0% -24%

EBIT 1,054 -2,346 -322%

Note: Revenue, COGS, Gross Margin and EBIT figures are in $M.

Exhibit 40: Stackelberg Game Model vs. Cournot Game Model

Both models assume the “n” players are non-cooperative, price-takers, all producing a homogenous product. The Stackelberg model (devised by Heinrich Von Stackelberg in 1934) assumes the players enter the market sequentially, and each player has full knowledge of previous entrants’ quantity decisions. The Cournot model (devised by Antoine Augustin Cournot circa 1870) assumes the players enter the market simultaneously with no guarantees on the decisions of others. Both models assume number of players is known, barriers to entry exist to keep that number fixed, and all players know the demand function and type of game. All players are assumed rational and trying to optimize own profits. Cournot Stackelberg

Total Quantity ∑ ( ) ∑ ( )

Market Price (function of total Q) P(Q) = a – b Q ∀ a, b > 0 P(Q) = a – b Q ∀ a, b > 0

Total Cost for Firm i (function of

individual quantity produced)

( ) ∀ c, F ≥ 0 ( ) ∀ c, F ≥ 01

Equilibrium Individual Quantity q

.

q

. (

)

Equilibrium Total Quantity Q

.

Q

. (1 (

) )

Equilibrium Market Price P

P

( )

Equilibrium individual quantity

( )

( ) F

( )

( ) F

1 Cost function was assumed identical for all players for simplicity. The model changes if the fixed/variable costs differ from one player to another, but the insights stay the same.

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The Stackelberg model forces players to over-produce, leading to total capacity that exceeds the

Cournot game with same number of players. For example, with 3 players only (n=3) the first 3

players will produce 2x, 1x, 0.5x the Cournot individual-quantity respectively. This leads to 7/6

times the total capacity expected for the Cournot game, resulting in a lower price overall. Individual

profit for the first player will exceed that for the second, which will exceed that of the third. The

DRAM Stackelberg commodity game benefits the early entrant, and forces chronic over-production

with loss of potential profits. The first entrant (currently Samsung) is best shielded from the losses

(Samsung in this case)