Seagate to Purchase SanDisk? Definitely, Maybe Not

Rumors are flying about Seagate buying SanDisk or Intel's stake in Intel-Micron Flash Technologies (http://www.eetimes.com/news/latest/showArticle.jhtml?articleID=210004140). Does it make sense? Seagate does need access to low cost NAND flash to fuel its SSD ambitions. Here are some ways to think about it.

1. If Seagate were to purchase SanDisk or Intel's portion of IMFT, what are they going to do with all that capacity? SSDs are not going to be able to eat up all that capacity, at least not for the next couple of years. Does Seagate want to manufacture flash memory cards or supply to MP3 players? SanDisk's operating margin in 2007 was 8% and Seagate's 6.8% in FY08. However, if you strip out income from royalties and licensing, SanDisk's operating margins were -5%. Combining a primarily OEM HDD business with a low margin retail business could be challenging.

2. Seagate is primarily interested in enterprise SSDs which uses exclusively SLC NAND flash technology. Any SanDisk acquisition provides Segate with 150k 300mm wafers per month of MLC NAND technology. Spending $4 billion (market cap of SanDisk) to obtain MLC NAND flash technology for enterprise SSDs? (SanDisk and partner Toshiba currently do not manufacture any high density SLC NAND parts, although that could change in the near future.)

3. Seagate spends almost $1 billion in capex ($930m in FY08) p.a. in their HDD business. SanDisk in 2007 spent roughly $1.6 billion and Intel $1 billion in NAND flash. Looks like Seagate's capex would have to at least double if it wants to become a NAND flash manufacturer and it's balance sheet would be strained supporting such a high level of investment.

4. Intel is not ready to exit NAND flash, at least not in the near term. IMFT has typically been behind the technology leaders by 1-2 process generations. With the 34nm announcement, they are about to leap ahead. With the technology lead, IMFT will presumably have the lowest costs. In addition, Intel will be releasing a slew of competitive SSD offerings in the next months. If, with the lowest costs in the industry and a very strong product lineup, Intel still can't make money, then it will consider whether it makes sense to be in this business, but they're not going to quit before giving it their best shot.

Seagate needs access to low cost NAND flash and they don't need to obtain that access by getting into the retail flash card business or doubling their annual capex. They could achieve the same means by either investing a small equity stake in a NAND flash vendor or placing an upfront payment to secure NAND flash capacity at preferential pricing. Apple did something similar when it introduced its first flash-based iPOD. Such an arrangement also affords Seagate sourcing flexibility especially if those wild hockey stick projections of SSD shipments don't pan out.

NAND Flash Capex - Full Steam Ahead!

Despite the current oversupply environment and the heavy price drops this quarter (Intel reported ASP declines of 53%), NAND flash manufacturers are maintaining aggressive capex plans. Samsung's ramp of its Austin facility and Hynix's ramp of M11 will offset some of the retirement of 200mm NAND capacity from both companies.

IMFT has maximized its capacity at Manassas and Lehi and will ramp its Singapore fab with maximum capacity of 60k wpm starting in Q3/08. Toshiba/SanDisk's Fab3 reached its full capacity of 150k wpm in September 2007 with Fab4 volume ramp started in December. Fab4 is a massive fab with maximum capacity of 210k wpm.

Powerchip Semiconductor is currently building two fabs P4 and P5 dedicated to the manufacture of NAND flash. These fabs are not expected to ramp in volume until the 50nm generation in 2009.

Spansion as well as foundry partners TSMC and SMIC capex figures includes fungible capacity that may be used to manufacture Mirrorbit NOR.