Opportunity on Samsung - SanDisk Deal

09/17/08 Categories: Stock Investing and Investments

Samsung has recently made a cash offer of $5.8 billion to buy SanDisk Corp. (SNDK). SanDisk is a flash memory design, manufacturing, and marketing company. Their devices are used in many consumer electronics.
SanDisk deal, Samsung acquisition, technology M&A

SanDisk deal, Samsung acquisition, technology M&A

Samsung offered a $26 a share offer, which The Wall Street Journal reported as a 96% premium over SanDisk's September 4 closing price.

SanDisk rejected the offer saying it "undervalues" the company. Their reason for saying $26 is too low is because SanDisk's price has dropped over 75% since last October, and they believe Samsung is trying to take advantage of SanDisk's depressed price.

As of 1:33PM on Wednesday, September 17, SanDisk's shares stand at $21.00 as investors wait to see if negotiations continue. There is still a $5.00 premium on Samsung's original offer if that was the accepted price.

Samsung can do one of three things at this point:

Make a tender offer to SanDisk shareholders at their $26 or more offer. This allows shareholders to make the decision rather than management. This situation would give investors a profit by the premium amount (say the $5 more than if you buy at $21 now).
Increase their offer to buy. If SanDisk gets a higher than $26/share offer, they could accept. Investors would also profit from the premium, which would be higher than the premium $26 would provide.
Samsung could also just walk away. Typically, when a buyer walks away, the target/seller's share price drops dramatically. This is the potential downside.

As far as Investing Advice goes, I would structure this situation as follows:

Buy SanDisk at the near $20-$22 price per share.
Protect my losses by setting a stop at $18.50-$19.50 depending on your risk tolerance.
Wait for more word on the deal. If another offer or hostile offer is presented, set a limit price closely below the offer price to ensure profit is kept regardless of any deal complications. (ex: $28/share offer- set limit at $27.50)

Keep a watch on this deal very closely, it could provide you with easy investment gains. If the deal goes south, you have a protective stop to keep your losses to a minimum. Keep your eyes open to any opportunities in the stock market, most great investors know that a few great investments can account for almost all of your gains.