Significant Shareholder Views Current Offer as 'Wholly Inadequate,'
Believes Board Failed to Conduct 'Robust and Thorough' Sale
Process, Encourages Other Offers NEW YORK, March 20 /PRNewswire/ --
Elliott Associates, L.P., and its sister fund, Elliott
International, L.P., today announced that the funds filed a
Schedule 13D with the Securities and Exchange Commission disclosing
a 6.5% ownership position in the common stock of Lexar Media, Inc.
(NASDAQ:LEXR), and that the following letter has been sent to the
Board of Directors of Lexar: March 20, 2006 The Board of Directors
c/o Lexar Media, Inc. 47300 Bayside Parkway Fremont, CA 94538 Dear
Members of the Board of Directors: I write to you on behalf of
Elliott Associates, L.P. and Elliott International, L.P. ("Elliott"
or "we"), which collectively own approximately 6.5% of the common
stock of Lexar Media, Inc. (the "Company" or "Lexar"). Elliott is
extremely displeased by the current Micron transaction, in which
Lexar shareholders are to receive 0.5625 Micron Technology shares
per each Company share (the "Micron Transaction"), as we strongly
believe this transaction significantly undervalues Lexar. In our
view, the consideration under the Micron Transaction falls
meaningfully short of Lexar's standalone value and the valuation
discrepancy is even more egregious relative to Lexar's value
contribution to its acquirer. We believe this outcome was the
result of the Company's failure to conduct a robust and thorough
sale process, and we fully support and encourage interest from
other parties at levels more closely reflecting Lexar's true value.
While we firmly disagree with the level of consideration offered to
Lexar shareholders in the Micron Transaction, we fully agree with
the premise of selling the Company. As presented in our analysis,
Lexar is worth significantly more to an acquirer than it is on its
own and a sale of the Company can unlock meaningfully greater
shareholder value than continuing as a standalone entity. Despite
being advantaged by pursuing the right course of action, by failing
to engage all potentially interested parties in a transparent and
complete sale process, the Board has accepted a wholly inadequate
offer that meaningfully undervalues the Company both in acquisition
and standalone scenarios. The fact that Lexar's stock has traded
with heavy volume significantly above the Micron offer since the
sale was announced on March 8th may be viewed as the judgment of
the market as a whole that the deal is underpriced. As such, we
believe it is incumbent upon us, as Lexar shareholders, to
communicate directly that we fully support a sale of the Company
and are interested in considering all offers that more sufficiently
recognize Lexar's value. We reiterate our belief and disappointment
that a robust sale process for the Company was not conducted and we
assert that shareholders should receive greater consideration for
the valuable assets Lexar offers to its acquirer. In the exciting
flash memory space, Lexar brings numerous unique and valuable
assets to any acquirer: i) Lexar's innovative and leading NAND
controller and card design technology, ii) premium, trusted brand
names, including Lexar and Kodak; iii) an impressive 70,000
storefront distribution network with well-established retail
relationships; iv) estimated 2006 revenue of approximately $960
million, representing a sizable outlet for fab capacity; v) Lexar's
license to produce Sony's memory stick; vi) the Company's powerful
intellectual property portfolio, including 96 issued or allowed
controller patents; and vii) its in-process litigation against
Toshiba with meaningful expected value. All of these attributes
would be worth significantly more to a potential acquirer than they
are to Lexar as a standalone entity, thereby supporting the premise
of a sale of the Company. Lexar's business is currently dependent
on its ability to procure raw flash for use in its products.
Consequently, any potential acquirer with captive flash supply or
favorable supply agreements would be better able to price Lexar's
products competitively, as well as do so much more profitably. As a
result, the new company would be in a position to grow the top line
and enjoy gross margins much more in-line with competitors with
favorable flash supply. On the intellectual property front, any
larger and better-financed company would be in a significantly
stronger position to aggressively pursue and capitalize on current
and future litigation. We share below our view of the range of
values for Lexar under two different scenarios, both of which
exclude any value from litigation against Toshiba. In the first
scenario, we assume the Company enters into an appropriate supply
agreement for flash memory -- something we believe can be readily
achieved. In the second scenario, we assume Lexar is sold to a
strategic party with captive flash memory production, such as
Micron. Our analysis assumes 18% product gross margins in the first
scenario and 23% in the second scenario. Elliott believes these
assumptions to be reasonable given Sandisk's 35.5% product gross
margins (which allows for 12-13% margins for its flash production
component), and M-Systems' mid-20s% aggregate gross margins,
despite its lack of a fully diversified supply base or captive
supply, and greater OEM exposure than Lexar. BUSINESS VALUATION
Standalone, (all figures in $mm, New Supply Sold to Strategic
except per share) Agreement with Captive Supply Product Revenue 940
940 Current Royalty Revenue (1) 22 22 Total Revenue 962 962 Product
Gross Margin 18% 23% Product Gross Profit 169 216 Total Gross
Profit 191 238 Operating Expenses (current standalone) 125 125
Synergies / Efficiencies (2) (6) (18) Total Operating Expenses 119
107 Operating Income 72 132 Other Expenses, net (3) (3) (3) Pre-tax
income 69 129 Net Income, fully taxed at 35% 45 84 Valuation Range
(P/E Multiples) Equity Val Per Share Equity Val Per Share (4) (5)
(4) (5) 13x 683 $7.18 1,181 $12.42 15x 773 $8.13 1,348 $14.18 17x
863 $9.07 1,516 $15.94 Notes: 1. This royalty revenue excludes any
potential benefits of the pending Toshiba litigation. 2. We believe
5% reduction in operating expenses under the standalone case is
reasonable given current cost structure vs. industry; we also
believe 15% synergies in sale case is conservative. 3. Other
Expenses has been adjusted to account for lower interest income, to
avoid double-counting when including net cash in equity value. 4.
Equity value determined by net income multiplied by the P/E
multiple plus Lexar's current net cash ($52mm) and discounted NOL
valuation, as the income above is fully taxed (for conservatism
purposes). NOL balance is determined from the 2005 10K filed March
16, 2006. In the standalone case, we project usage of Lexar's NOLs
and discount the benefit back at 10% per year (discounted,
after-tax value of $46mm). In the sale case, we assume a Section
382 limitation on the NOLs, project usage, and discount back the
limited use at 10% per year (discounted, after-tax value of $41mm).
5. Per share equivalent assumes 95.1 million fully-diluted shares,
for acquisition purposes. These equity valuations of $683mm -
$863mm ($7.18 - $9.07, per share) under the standalone scenario and
$1.2bn - $1.5bn ($12.42 - $15.94, per share) under the sale
scenario, solely reflect Lexar's business value under the two
scenarios, and EXCLUDE the potentially considerable benefit of the
Company's pending litigation. In the course of our diligence, we
have performed an extensive investigation into the merits of both
the trade secret case and the patent infringement cases currently
pending with Toshiba, including retaining intellectual property
counsel. With regard to the trade secret case, liability has been
found in Lexar's favor and initial damages, prior to being vacated
on certain technical evidentiary issues, were determined to be $465
million. Despite the pending appeal, we believe that ultimately
there potentially exists several hundred million dollars of value
associated with this case. With regard to the patent cases, it is
our view that Lexar's position is strong, as the claim construction
ruling was favorable to Lexar and the relative size of the company
vis-a-vis Toshiba could bode favorably in the assessment of any
infringement damages. We also believe the eventual recovery in this
case could prove substantial. We think it bears repeating that with
a larger, better-financed parent company, Lexar would be in a far
stronger position to recognize meaningful value from this
litigation, potentially in excess of the business valuation of the
Company. Our view of the value of the Company's pending litigation
is presented below, both in the trade secrets case and the patent
litigation cases. As each of these cases is still pending, we have
presented what we believe to be conservative ranges of the
potential outcomes. Despite the variability of the ranges
presented, our extensive diligence gives us confidence that the
recoveries could be substantial. LITIGATION VALUATION (all figures
in $mm, except per share) Trade Secret Recovery Range $200 $300
$400 $465 $600 Fully taxed at 35% $130 $195 $260 $302 $390 Per
Share Value (95mm fully- diluted shares) $1.37 $2.05 $2.74 $3.18
$4.10 Patent Case Estimate Range $300 $400 $500 $600 $700 Fully
taxed at 35% $195 $260 $325 $390 $455 Per Share Value (95mm fully-
diluted shares) $2.05 $2.74 $3.42 $4.10 $4.79 TOTAL LITIGATION
VALUE $500 $700 $900 $1,065 $1,300 Fully taxed at 35% $325 $455
$585 $692 $845 Per Share Value (95mm fully- diluted shares) $3.42
$4.79 $6.15 $7.28 $8.89 In the following summary table, we develop
our view of Lexar's overall valuation. We apply a conservative
range of litigation recovery based on both the trade secrets and
patent litigation cases, and add these together with the standalone
and sale to strategic acquirer business valuations. We believe
these valuations to be representative of Lexar's potential value as
a standalone business or its potential value to an acquirer and
note that in both scenarios Lexar's value meaningfully EXCEEDS the
consideration under the Micron Transaction, currently worth only
$8.31 per Lexar share. (1) TOTAL COMPANY VALUATION (all figures in
$mm, except per share) P/E Multiple Range 13x 14x 15x 16x 17x TOTAL
EQUITY VALUE STANDALONE Business Value $683 $728 $773 $818 $863
Plus: After-tax Litigation Value $325 $455 $585 $692 $845 TOTAL
STANDALONE VALUE $1,008 $1,183 $1,358 $1,510 $1,708 Per Share Value
(95mm fully- diluted shares) $10.60 $12.44 $14.28 $15.88 $17.96
TOTAL EQUITY VALUE TO STRATEGIC ACQUIRER Business Value $1,181
$1,264 $1,348 $1,432 $1,516 Plus: After-tax Litigation Value $325
$455 $585 $692 $845 TOTAL VALUE TO STRATEGIC ACQUIRER $1,506 $1,719
$1,933 $2,124 $2,361 Per Share Value (95mm fully- diluted shares)
$15.84 $18.09 $20.34 $22.34 $24.83 In the chart above, the range
between $1.5bn and $2.4bn ($15.84 - $24.83, per share), which we
believe to be appropriate, and which excludes any value associated
with Lexar's robust intellectual property portfolio outside its
currently pending litigation, is intended to demonstrate to the
Board, the public, and potential acquirers, the potential value
that Lexar could offer to an acquirer. While we recognize that
there necessarily must be a division of this value between acquirer
and target, and that some probability factor must be assigned to
the potential litigation recovery, the current division of value
between Micron and Lexar is inequitable and unacceptable, in our
view. Under the current Micron Transaction, only approximately $790
million of value is being shared with Lexar shareholders. (2) As a
result of this considerable discrepancy, Elliott does NOT support
the Micron Transaction at the current price. We encourage other
Lexar shareholders to come to the same conclusion. Moreover, we
strongly believe other parties in the space should consider the
meaningful value that Lexar can offer to their businesses and the
extraordinarily low bar set by the current transaction in order to
acquire such value. Additionally, we urge you, the Lexar Board, to
fulfill your fiduciary obligations to the Lexar shareholders by
giving full consideration to any Acquisition Proposal, as the term
is defined in the merger agreement, presented to the Company by any
third party. Should you have any questions, feel free to call me at
212-506-2999. I am also available to any potential acquirer to
discuss the assumptions in this analysis or our views regarding the
significant value Lexar can provide to their businesses. Regards,
/s/ Jesse A. Cohn Jesse A. Cohn About Elliott Associates, L.P.
Elliott Associates, L.P. and its sister fund, Elliott
International, L.P., have more than $5.6 billion of capital under
management as of January 2006. Founded in 1977, Elliott Associates
is one of the oldest funds of its kind under continuous management.
(1) Calculated as of market close on March 17, 2006, based on
Micron share price of $14.77 multiplied by the exchange ratio of
0.5625 equals $8.31 in value per Lexar share. (2) $790 million
Micron Transaction calculated as of market close on March 17, 2006,
based on Micron share price of $14.77. Assumes 95.1 million
fully-diluted Lexar shares and a per-share offer value of $8.31.
DATASOURCE: Elliott Associates, L.P. CONTACT: Scott Tagliarino,
+1-212-506-2999, cell - +1-917-922-2364
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