Why didn't Samsung acquire Universal Display back in 2011?

In August 2011 Samsung signed a long-term license agreement with Universal Display. This agreement (which runs till 2017, and will probably be extended) included a license fee and allowed Samsung to acquire and use UDC's patented phosphorescent OLED materials.

In total, Samsung is set to pay (and already paid) UDC hundreds of million of dollars in royalties and materials. This got me wondering - why didn't Samsung acquire UDC back then, which would have given them a lock on the OLED market? Let's look at the numbers, but the answer is probably not related to the financials, really.

Back before they signed the agreement, UDC's shares traded at around $25-30 per share. This translates to a value of $1.1 billion to $1.4 billion. Back then Universal had over $350 million in cash (this was before the Fujifilm IP acquisition). This means that they probably could have bought UDC for around $1.5 billion (offering shareholders a 70% premium).

Samsung is paying $60 million in royalties to UDC in 2015 alone. I estimate that by the end of 2017, Samsung would have paid $350 million in royalties - and this was known at the time they signed the agreement. Let's say that SDC will also pay the same amount in material purchases in the same time frame. So that means SDC will pay $700 million to UDC - which they could have saved if they have bought the company.

It's highly likely that Samsung will continue to pay royalties and buy materials from UDC even after 2017. But even so, it means that in 2011 the true cost of Universal Display was about $800 million for Samsung. UDC is a profitable company with a bright future (that Samsung ensured when they signed that agreement). But more impotently - UDC has the basic patents for phosphorescent OLEDs, which really means that you cannot produce efficient OLED panels without a license from UDC. This could have given Samsung a control over what they already knew in 2011 to be the next-gen display technology - for a relatively small sum for Samsung, who already invested billions of dollars in OLED production capacity in past years.

But if Samsung controlled Universal Display, it would have meant that other display makers would have been very reluctant to invest in OLED technologies - as they will always be under Samsung's control. This could have been a death blow to the entire OLED industry - and Samsung knows that a single company (even as large and wealthy as Samsung) is not enough to take a technology such as OLED and make it the leading display technology - they need a large ecosystem of research, development and production. I think Samsung and other players are doing the right choice by not acquiring UDC and keeping it independent.

Disclosure: the author of this post holds some shares in Universal Display

Posted: May 09,2015 by Ron Mertens

Comments

How do you think Apple might view UDC as a take over candidate? The have a strange history in acquiring material firms (liquid metal)  or cornering them into bankruptcy with impossible contracts- sapphire

During the period you describe Robert Citrone at Discovery Capital certainly made a major move to acquire shares. Now any potential buyer will likely have to include him at the buy out negotiation table. I'm not sure he would have favored SMD getting off so easy. (he's known for early investments and lots of patience in emerging markets and technologies ... he may not have been in the mood for a quick payoff...)

What do you estimate the royalty and fee terms that LG pays to UDC