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Monday, October 20, 2008

Sandisk tonight

Their quarter is going to be an absolute disaster. Pricing was worse than they guided. Product gross margins were expected to be around zero – that sounds like wishful thinking. Selling part of their fab investment to Toshiba for a billion dollars smells like they envision a protracted recovery and need to show people they have cash to survive it. I like them divesting those assets because I think they make the company impossible to value – the Toshiba JV is most of their cost of goods and its an off balance sheet item. It's extremely investor unfriendly.

The wildcard here is Samsung, which has sent a letter to the board saying they want to acquire the company for $26. Sandisk rejected them cold the first time around. I wonder, though, if the quarter is as bad as I think it is, and if the chart really does trade to $9 like it says it will… will they be able to justify not trying to take the offer?

I think the offer shouldn't be there in its prior form – and selling the fabs probably cemented a lower bid. Samsung is in the power seat here, much the way Microsoft is with Yahoo. Sandisk, by rejecting the bid, has told shareholders they can do better themselves – but the quarter will likely indicate otherwise. There should be a lot of shareholder pressure to consider Samsung's offer. And Sandisk is going to be in a tough spot trying to tell investors why they won't pursue it.

The stock is interesting under $10 after a blowup. That may be very wishful thinking. I think for the stock to work you need Samsung alive and I think they'd be really silly not to bid much lower. I think it's going to take a very strong stomach to hold it after this number. I don't own it.





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