At the end f June, I wrote a post for InvestorPlace saying that memory chip maker Micron Technology (MU) looked dirt-cheap at current levels.
Well, I wasn’t the only one who saw the value. It looks like Tsinghua Unigroup is also interested in the company. In fact, it appears that this Chinese-based chip designer is planning to make a $21-per-share buyout bid — for a total value of about $23 billion.
So the question becomes: Is there still time to make a value play with MU stock, or has today’s 12% jump already soaked up all the potential?
First of all, it won’t be easy for Tsinghua to pull off the deal. Keep in mind that the U.S. is likely to impose an onerous security review. After all, the deal for Micron Technology would be the biggest acquisition from a Chinese firm.
Besides, Congress may have concerns that the U.S. will lose a strategic asset that develops key technologies for PCs, smartphones and other mobile devices. Given massive hack of the U.S. federal government’s employee databases (impacting nearly 22 million people) — allegedly carried out by China — there will certainly be lots of huffing and puffing from politicians.
MU Stock Is Actually in a Good Spot, Despite Declines
The U.S. government has already flexed its muscles with other deals such as Huawei Technologies’ acquisition of 3Com back in 2008.
But then again, Tsinghua may still be able to get its prize. The company has proven to be a strong partner for U.S. companies and even snagged a 20% investment from Intel (INTC). Interestingly enough, Tsinghua recently purchased the China-based networking business of Hewlett-Packard (HPQ) for $2.3 billion.
In the meantime, Micron Technology will be under intense pressure to drive more shareholder value. To this end, there may be actions like increased stock buybacks or even a special dividend. MU could also seek out other bidders, such as Samsung (SSNLF), SK Hynix or Toshiba Corp. (TOSYY).
Or, if it was really opposed to the deal, Micron could always try going private.
Even after today’s jump, MU stock is still cheap, trading at a forward price-to-earnings ratio of a mere 7.7. Granted, the company has been weighed down from the continued sluggishness in the PC market. But for the most part, it seems that investors have already factored in that negativity.
In fact, there should be some other catalysts to help boost MU stock. One is the upcoming launch of Microsoft’s (MSFT) Windows 10 operating system, which should help perk up PC sales. Micron Technology will also roll out its next-generation 3D chips soon. The technology involves stacking circuits on top of each other, allowing for substantial increases in capacity, which will be ideal for smaller devices. Micron Technology has a partnership with Intel that should help boost the sales.
In other words, there are good reasons to be optimistic about the prospects of MU stock. and if anything, the bid from Tsinghua is validation that there’s still plenty of value.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
