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Tickers in this Article: RMBS, MU, SNDK, OTC:SSNLF.PK
A recent rumored purchase of Sandisk (Nasdaq:SNDK) is a good share-selling opportunity for memory-chip makers Rambus (NYSE:RMBS) and Micron Technology (NYSE:MU) as profitability among the group continues to decline. (To learn more about corporate purchases, read our tutorial on The Basics Of Mergers And Acquisitions.)

Rumor Caused A Nice Rally

The rumored purchase of Sandisk by Samsung Electronics caused a nice rally September 5 in not only Sandisk but other memory-chip makers like Micron Technology and Rambus. Samsung is believed to want to purchase Sandisk to increase its market share in the flash memory category and to reduce the fees it pays to Sandisk in royalties.



Speculation on buying Sandisk by other partners, including Toshiba, has priced the company in the $3 billion range, which is below its current market cap of about $3.75 billion. For this reason, coupled with the poor performance of Sandisk, Micron Technology and Rambus in recent quarters, selling the memory-chip makers on strength looks like an attractive trade.



Earnings for Micron Technology and Rambus

The value of Sandisk might reach the $3 billion buyout price as it has deteriorating earnings along with Micron Technology and Rambus, all in the memory-chip industry. Sandisk's earnings are falling 114% in the current quarter compared to last year and 115% in the next quarter year over year. The company has missed its past two quarters with June 2008 being a disastrous miss of 183%.



Micron Technology has seen its earnings fall this year compared to last year by a total of 195%. With revenue still growing 5-9% per quarter, price reductions on memory chips are making new sales less profitable. The company is experiencing a 25% decrease in profit margins and a 17% decrease in operating margins for the trailing 12-month period. This is a good time to buy many kinds of computer memory, but not a good time to purchase shares in the companies that make those products.



Likewise, Rambus is having a very tough year. In fact, it has the worst earnings picture of the three companies. This year, Rambus has seen earnings decrease 650% compared to a year ago and has seen its revenue slow by 26% in the same timeframe. In addition, the company has not been close to what analysts have expected in an earnings release the past four quarters. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)



Selling On An Uptick

The recent increase in value of the three stocks September 5 due to the Sandisk rumor is a good opportunity to short sell Micron Technology and Rambus - the two stocks not associated with the buyout rumor. Short-selling Sandisk would be a high-risk trade as the possibility of the buyout could create a spike once announced. However, using the increased value in Micron and Rambus as entry points is a lower-risk proposition that should be profitable.



Conclusion



The unconfirmed market rumor that Samsung will purchase Sandisk in the $3 billion range led to a rally in all memory chip makers September 5, even though the fundamentals for Sandisk, Micron Technology and Rambus continue to be weak. Use the stock rally in the fundamentally weak industry to get both Micron and Rambus short.


For another strategy that can be employed when takeovers happen, read Trade Takeover Stocks With Merger Arbitrage.


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