The letter
The text of the letter sent by Dr. Eli Harari to Dr. Yoon Woo Lee, Samsung's Vice Chairman and Chief Executive Officer, on September 15, 2008 is included below:
September 15, 2008
Yoon-Woo Lee, PhD
Vice Chairman and Chief Executive Officer
Samsung Electronics Co., Ltd
Samsung Main Building
250, 2-ga, Taepyeongno
Jung-gu, Seoul 100-742
Republic of Korea
Dear Dr. Lee:
This letter confirms many of the points we raised when we met with you last week. We received your unsolicited, non-binding proposal dated August 9, 2008 to acquire SanDisk Corporation for $26 per share in cash. After a detailed review, with advice from our outside financial and legal advisors, our board of directors has unanimously concluded that your proposal significantly undervalues SanDisk given the longer-term prospects of our business and does not reflect the substantial synergies Samsung can obtain from the proposed acquisition. In addition, your proposal fails to provide adequate deal certainty, thereby exposing SanDisk and its stockholders to unacceptable risk. Finally, your approach raises the question of whether this action is simply an effort to gain leverage in the ongoing negotiations to renew our patent cross license agreement and evidences an unwillingness to engage in a process designed to legitimately protect SanDisk's stockholders' interests.
We acknowledge the interest that you have expressed in SanDisk over the past few months and, as expressed in the discussions we have had since May 2008, the SanDisk board of directors remains open-minded about a transaction that appropriately addresses the issues of value, deal certainty and process. However, for these and other reasons we believe your proposal is not consistent with the SanDisk board of directors' objective of maximizing stockholder value and is not in the best interests of SanDisk's stockholders.
VALUE
While you emphasized that your offer is a premium of 56% over the stock price on the date of your non-binding proposal, in our meeting on May 22, 2008 you implied that Samsung was prepared to pay a significant cash premium over the then $28.75 price of SanDisk's shares. Today, SanDisk's share price is close to its lowest price in five years, and your offer represents a 55% discount to the 52-week high. SanDisk's stock price is significantly depressed at this time given industry cyclicality, the uncertainty resulting from our unresolved patent cross license agreement renewal with you and general equity market conditions, and therefore does not reflect the intrinsic value of SanDisk's business.
The flash memory business is a cyclical growth market, which is characterized by periods of strong growth and profitability such as we saw between 2002 and 2007, punctuated by periods of oversupply and declining flash prices like those we are experiencing today. Our board of directors is focused on creating long-term value for our stockholders and believes that SanDisk has the right strategy and the requisite financial resources to manage through a prolonged downturn and emerge as a stronger competitor. We are taking appropriate actions to further fortify our financial position and are confident that in the longer term we will benefit when exciting new flash applications, such as storage in multimedia handsets, flash solid state drives, and new consumer portable applications fuel the next period of industry profitability and growth.
You have described on numerous occasions the significant synergies that Samsung will achieve from acquiring SanDisk, one of the reasons why we believe you were willing to pay a significant premium over the $28.75 share price on May 22, 2008. Nothing has materially changed since that date in terms of the synergies Samsung can realize from acquiring SanDisk. These include avoiding billions of dollars of royalties over the coming decade; gaining access to our x3 (three bits per cell) and x4 (four bits per cell) knowhow; owning our advanced controller technology; owning all of the leading card formats; gaining control of our revolutionary 3D (three dimensional rewritable semiconductor memory) technology - the best candidate to replace NAND flash in the coming decade; controlling our strong brand, broad retail distribution and leading market share in flash cards worldwide; and other cost and revenue synergies.
We also note that the run rate of Samsung's royalties to SanDisk continues to grow. Our view remains that without the right to use SanDisk's patents, Samsung's stand-alone NAND business' prospects would be significantly compromised. Conversely, ownership of our fundamental patent portfolio would greatly strengthen your patent position in emerging markets for flash storage like SSDs and managed NAND chipsets. We hope that your current offer is not an attempt to capitalize on the uncertainty reflected in our share price while this IP issue remains unresolved or a negotiating tactic in the licensing negotiations. SanDisk's stockholders deserve to be fairly compensated for the value SanDisk offers Samsung, and your current offer fails to recognize and monetize this value.
DEAL CERTAINTY
From the outset, we have expressed to you our concerns about the risks to SanDisk of moving forward with a transaction with Samsung if an announced transaction does not close. We note that any transaction between SanDisk and Samsung will be subject to regulatory review, including in the United States and the European Union. In addition, any announcement of a transaction with you could also have a negative impact on our business due to various factors. The simple, but important, point is that without both maximum certainty of closing as well as a viable path for SanDisk to continue as an independent entity should the transaction not close despite your best efforts, your proposal creates unacceptable risks for our stockholders and is not in their best interests.
Because of this, we have proposed negotiating a replacement cross license and supply agreement, both of which would become effective in August 2009 if an announced transaction does not close. We have also requested that you commit to certain terms to ensure that a transaction has maximum certainty of closing. Despite our repeated requests Samsung has failed to address these legitimate concerns.
PROCESS
We have been clear that together with price, these critical issues of deal certainty and risk mitigation must be addressed before we provide you due diligence access to the highly confidential and competitively sensitive information that you have requested. We note that there are sizeable synergies in this transaction for Samsung, most of which you control and can determine without access to confidential information. In addition, given that Samsung operates in the same industry and that SanDisk is a public company, we are confident that Samsung possesses the necessary information to address the issues we have highlighted above prior to gaining access to confidential information. However, despite our many attempts, including those by our lead outside director, Mr. Irwin Federman, to communicate the importance of these process issues and offering a reasonable roadmap by which we both can address them, you have rejected our guidance and instead insisted on access to highly confidential information about SanDisk before these issues are resolved.
CONCLUSION
The members of the SanDisk board of directors have taken, and will continue to take, their responsibilities to SanDisk's stockholders extremely seriously. We remain committed to the goal of maximizing stockholder value. As Mr. Federman has said to you on multiple occasions, including in our recent meeting in Seoul, on September 11, 2008, the SanDisk board of directors is open minded about a transaction with Samsung if it represents a price that recognizes the long-term intrinsic value of SanDisk and the significant synergies that accrue to Samsung, provides deal certainty to SanDisk and can be conducted in a process that adequately protects the interests of SanDisk's stockholders. Samsung's current offer and approach falls well short on all counts. As such, we respectfully reject your proposal.
Very truly yours,
Eli Harari, PhD
Chairman of the Board and Chief Executive Officer
