In late April and mid-May Supply Chain Matters commentaries, we noted that Elpida, a Japan based DRAM chip competitor with Samsung and Hynix, had recently won a coveted supply contract with Apple. This supplier had previously filed for bankruptcy protection, and had become a takeover candidate. We cited a Bloomberg Businessweek report characterizing Elpida as “the hottest takeover in tech” because of the implications of changing the fundamental competitive dynamics of the DRAM market based on supply contracts with Apple.

Today comes news that Micron Technology Inc. , who assumed financial sponsorship of Elpida shortly after the bankruptcy filing, has won the coveted prize in an  agreement to acquire Elpida Memory Inc. for roughly $2.5 billion. This deal thrusts Micron from the number four, into the number two slot for memory suppliers, behind Samsung and slightly ahead of Hynix, according to industry market forecasters. It further doubles Micron’s share of the global DRAM market to 24 percent, according a report in the Financial Times. The deal calls for Micron to put up $750 million initially and pay a total of $1.75 billion in annual payments through 2019. The deal also calls for Micron to maintain Elpida operations and staffing.

Micron’s CEO was quick to point out that the nearly 50 percent in capacity gained from this acquisition costs less than a third of what it would take to build that capacity from scratch in today’s money resources. Micron also gains an additional foothold in the mobile DRAM supply chain. The market for flash memory chips utilized in mobile devices such as smartphones, tablets and MP3 players remains attractive.  Financial news accounts also reference Micron’s previous attempts to acquire Hynix for $4 billion in 2002, but the deal fell through because of concerns from the government of Korea.

In the consumer electronics supply chain, scale is an important differentiator along with coveted supply agreements.  Needless to say, Apple is the biggest and most influential player in this space.  Recent intellectual property and patent spats with Samsung, a very large volume supplier to Apple for DRAM and other components, have motivated Apple to secure other supply agreements that can buffer Samsung’s influence and supply clout.  Micron, with this deal, could be a beneficiary of this recent development, but needs to keep newly gained capacity efficiently utilized.  This segment has also seen lots of change through the years.

Time will obviously tell the rest of this story.

Bob Ferrari