Taking a look at the EU’s Rambus decision
Today's Financial News - Posted June 12, 2009
The European Union handed down a big decision today. It is sending shares of Rambus (NASDAQ:RMBS) well into positive territory. But is the company the ultimate winner? There is more than one way to play the situation.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The world’s governments have a scary level of control over investors. The worse the economy appears, at least politically, the more the government acts, or reacts.
When the European Union begins to look more conservative than good ole Uncle Sam, you know things have changed.
But even our European counterparts are not above dipping their hands into the world of business. Fortunately, they know their limits.
Rambus (NASDAQ:RMBS) investors are about 15% richer today as the EU backs down on its anti-trust suit against the company. As long as Rambus reduces its royalty rates for its DRAM patents, regulators promise to drop their case and eliminate the threat of fines.
The news, while still tentative, clears a dark storm cloud over the company, and frankly, the memory chip industry. It helps to breathe new life into what was the slowly decaying body of free global markets.
But even with the questions surrounding the case now in the past, is this truly good news for the company? Over course, the answer is far from black and white.
Everybody wins, sort of
With the EU backing down, the company will be able to focus on core business functions without the threat of getting hammered by fines and litigation down the road.
But Rambus also made some strong compromises. It no longer has the upper hand in its pricing model.
The revenues the company will receive from locking itself into the heart of the memory business will certainly not be as high or as dependable as the company has seen in previous quarters.
Today’s surge in share price is not necessarily because an increase in any net present value equations. It comes thanks to the elimination of risk and uncertainty, two of Wall Street’s biggest enemies.
Looking forward, it is Rambus’ customers like Micron Technology (NYSE:MU) that should really be paying attention. Shares of Micron are on the decline today as investors were hoping for stronger sanctions.
While the EU’s decision lowered uncertainty for Rambus, it raised it for Micron. Now the company must figure out exactly what its future costs look like. Will they be dramatically lower or will Rambus get off easy?
Ultimately, the decision will be a relief to Micron. With more pricing power on its side, it will have the leverage it needs to increase shareholder value.
If you are looking to buy shares of either of these companies, I do not blame you. The future looks bright for both.
Wait until the heat dies down and the deal is finalized in a month or so. By then you will likely be able to grab the shares at a discount.
The world’s governments are working overtime, but if investors take advantage of the fast-moving action there are plenty of profit opportunities to be had.
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