Why Investing in DRAM Industry makes great sense as Painful and Prolonged Industry Consolidation leaves only Three players left – Micron, Samsung and Hynix

The DRAM Industry has seen a long and painful consolidation with many players going bankrupt and others being gobbled up by bigger companies. Many companies left the DRAM business because of high capital costs, relentless competition and technology upgrades every year. In the last five years only around 10 companies were left from Taiwan, Korea, Japan and the USA. Note the big Japanese conglomerates like Toshiba, Sharp and others had left the business and only Japanese player Elpida was left. In Taiwan there were four five players like Powerchip, Promos and others. However they were small and dependent on the Japanese and Americans for technology. In the USA , Qimonda went bust leaving Micron as the sole American DRAM manufacturers.

Now Elpida has gone bankrupt and Micron has bought the company for $2.5 billion leaving only three players left in the industry. The others are too small to count and will probably shut down or left to serve the niche markets. The DRAM which is used in PCs, phones etc. has become a commodity of late seeing big up and down cycles of profits and big losses. The advent of tablets has led to a decreasing use of DRAM in favor of Flash memory. The DRAM industry requires huge capital investment each year to upgrade semiconductor equipment which leads to very low return on capital. Any company which misses out on one investment cycle gets left behind as the cost decrease and the productivity increases changes dramatically with each upgrade.

Only Samsung due to its diversified business has managed the capex investment cycle well while others like Elpida have struggled to invest from negative cash flows. The high levels of debt incurred to invest in new technology finally brought down Elpida. The DRAM industry now seems a good investment as only three big players remain which would mean increasing price stability and profits.

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Micron reportedly strikes $2.5B deal for Eplida

SAN FRANCISCO – U.S.based memory chip vendor Micron Technology Inc. has reached a deal to acquire bankrupt Japanese DRAM vendor Elpida Memory Inc. for roughly 200 billion yen (about $2.5 billion), according to an English language report by Japan’s Nikkei newspaper.

According to the report, about 140 billion yen (about $1.75 billion) of the acquisition price will go to pay off Elpida’s debt. About 70 percent of Elpida’s outstanding debt, totaling about 420 billion yen (more than $5.2 billion) won’t be repaid, according to the report.

According to C.J. Muse, an analyst with Barclays Capital, the actual purchase price Micron will reportedly pay for Elpida is roughly the $1.75 billion that will go toward Elpida creditors. The remainder, about 60 billion yen ($755.5 million), will go toward investments to upgrade Elpida’s production facilities, Muse said.