Bloomberg News

Published: July 31, 2006

SAN FRANCISCO SanDisk, the world`s largest maker of memory cards in consumer electronics, has agreed to buy M-Systems Flash Disk Pioneers for about $1.3 billion in stock to add more products that store songs in mobile phones.

M-Systems stockholders will receive 0.764 of a SanDisk share for each share they own, Milpitas, California-based SanDisk said Sunday. Based on SanDisk`s Friday close, that is about $36 a share, or 13 percent more than M-Systems` last close. SanDisk said it would assume about $75 million of M-System`s debt.

The acquisition gives SanDisk, a partner of Japan`s Toshiba, access to technology that can double the storage capacity on a semiconductor, challenging rivals including Samsung Electronics. Flash sales are forecast to grow faster than any major segment of the $227 billion chip industry as mobile phones and music players need more memory to store music and pictures.

``SanDisk is getting a stronger line-up of products and patents,`` said Peter Yu, a Seoul-based semiconductor analyst for BNP Paribas. ``M-Systems has some good patents.``

Kfar Saba, Israel-based M-Systems announced on May 11 a new technology that may cut production costs of memory devices by as much as 50 percent by cramming in more storage capacity per chip.

President and Chief Operating Officer Sanjay Mehrotra on SanDisk said in a telephone interview that the acquisition will contribute to earnings by the end of the first year.

SanDisk and Tokyo-based Toshiba are building their fourth memory chip factory in Yokkaichi, located in central Japan, in August. Production will begin by December 2007, Toshiba said.

SanDisk`s Sansa e200 music players have been ``well received,`` Eli Harari, chairman and chief executive said last week. The company`s second-quarter profit rose to $95.6 million, or 47 cents a share, beating the 44 cent average estimate of analysts surveyed by Thomson Financial.

Shares of SanDisk, up 39 percent in the past year, rose 1.7 percent to $47.14 in Nasdaq Stock Market trading on Friday. M- Systems gained 2.3 percent to $31.79 on the Nasdaq. The stock has climbed 23 percent in the past year.

M-Systems shares have increased 16 percent since July 20, when the Israeli financial daily Globes reported that SanDisk had offered to buy the company for about $1.5 billion.

M-Systems is scheduled to report second-quarter earnings before U.S. markets open Aug. 7. Earlier this month, the company restated some statements after reviewing its stock-option grants, reducing income for the period between 1999 and 2005 by about $18.8 million.

The new transaction, which requires shareholder and regulatory approval, is expected to be completed in the fourth quarter of 2006, SanDisk said.

SanDisk competitors include Lexar Media, which was bought by Micron Technology for $801 million on June 22, and Suwon, South Korea-based Samsung Electronics, the world`s largest memory-chip maker.

``This transaction better positions SanDisk to serve the expanding storage needs of handset manufacturers and mobile network operators,`` Harari said. ``The combination with M-Systems will be a catalyst in the development of next-generation flash-enabled consumer applications.``