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Monday, July 31, 2006

The New SanDisk After Acquiring M-Systems (SNDK, FLSH)

What will the new SanDisk (SNDK) look like now that they have announced the intent to acquire M-Systems (FLSH)?

For starters, an inch may go a mile. The company claims that there are essentially no overlaps in company operations.

SanDisk (SNDK) is a $9.1 billion market cap flash memory company that is mostly into consumer electronics and gadgeets, although recently the company began selling its own line of media players. M-Systems (FLSH) makes PDA and gadget flash as well, but they are also on the corporate side for larger systems and larger design contracts with many outide companies in and out of the semiconductor realm.

When you factor out the small amount of dilution, it will barely affect any of the multiple of SNDK stock. SNDK has a $9.1 Billion market cap; FLSH will have an implied $1.5 Billion market cap. SNDK has a P/E of nearly 25; FLSH has nearly a 28 P/E. The combined company according to the CEO should have $10 Billion in annual revenues in 4 to 5 years, which he said is a stretch but doable.

The company also got to do this deal for all stock, allowing it to keep its powder dry. SNDK did just soar last week after beating expectations. It also has close to $2.4 billion in liquid assets and it has a very little in long-term debt. It does have to list a $1.15 billion convertible note offering, but if the company can keep up its fast pace that will essentially take care of itself as far as the balance sheet is concerned.


The other interesting part here is that further out this will require the index fund managers to have to acquire more SNDK stock. SNDK is a member of the S&P 500, the NASDAQ 100, the Semiconductor HOLDRs, and various Russell index member weightings as well. By guestimation it looks like certain index funds may have to increase their weighting in SNDK by anywhere from 8% to 11%. That is a broad range, but should provide a decent level of support for the stock when this deal gets closer to the Q4 closing.

This is subject to various approvals in the US and in Israel, but there are no major hurdles expected.

Jon C. Ogg
July 31, 2006
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