The stage is set for a protracted hostile takeover battle between South Korean electronics giant Samsung and flash memory storage maker SanDisk. Samsung offered about $6 billion for SanDisk, an amount that was nearly double its market value when the bid was made public. But SanDisk rebuffed the offer, saying the timing was opportunistic and that the price undervalued the company.

Is SanDisk justified in asking for a higher price? Its board says the $26 per share offered by Samsung is a 55 percent discount to the stock’s 52-week high. But since that $55.98 high last October, SanDisk shares have been on a downward spiral, losing more than three-quarters of their value since the beginning of the year due to a combination of oversupply in the memory chip market and concerns about consumer spending.

Caris & Co analyst Betsy Van Hees said in a note she was “disappointed and surprised by SNDK’s dismissal of the offer,” and believe the board is “looking in the rearview mirror through rose colored glasses.”

Van Hees said the memory market is worsening, consumer demand is slowing globally, and the future of negotiations on royalties that Samsung pays SanDisk to use some patented technology is uncertain. What’s more, she thinks a competing bid from rival Toshiba is unlikely, so SanDisk should take what it can get (and an 80 percent deal premium is a handsome one by all standards).

Sounds a bit like the Microsoft-Yahoo saga, doesn’t it, given the healthy deal premiums offered by both Microsoft and Samsung, and the strongly worded rejections by the founder-CEOs of both target companies.

But some analysts think Sandisk CEO Eli Harari is smart to hold out for a higher offer. Lazard Capital Markets analysts Daniel Amir and Lauren Stoller wrote in a research note that Samsung’s offer is “respectable, but not enough.” They argue that SanDisk’s stock is at a five-year low in the midst of a cyclical downturn in memory chip prices, so the actual value of SanDisk is higher. Amir and Stoller think SanDisk is gunning for a per-share price above $60, but they doubt Samsung will pay anything more than mid-$30s if it decides to sweeten its bid.

Here’s what could happen next: Samsung could raise its offer or take its bid directly to SanDisk investors, Toshiba or another white knight could step in with a counter-offer, or Samsung could walk away. Whatever it is, “SanDisk’s management will not sell easily” right now, as Cowen & Co analyst Daniel Berenbaum said.

“It’s very clear to me — we’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down,” Morgan Stanley Chief Executive John Mack told employees in a memo.

Ya think?

Morgan’s stock dropped 47 percent yesterday, and shorting investment banks has become the trade du jour. But it is odd for the head of a Wall Street investment bank to inveigh against short selling–hedge funds that bet on shares dropping are some of Morgan Stanley’s best customers. 

And Morgan Stanley itself was caught up in the debate over how to regulate and manage short selling a few years ago. It was one of 11 investment banks accused in 2006 of failing to deliver securities sold short by hedge funds – a service they made a healthy business of. Mack himself was named in an SEC investigation into the claims.

Today, new SEC rules on short selling come into effect that are aimed at forcing short sellers to be more transparent and responsible. Maybe they will have the desired effect. Then again, all this bellyaching about shorts may seem irrelevant if the $180 billion of global central bank support lifts markets in the coming days. 

Deals of the day:

* China’s CITIC Securities is not holding any talks on investing in Wall Street bank Morgan Stanley, a senior executive at CITIC Securities, the country’s largest brokerage, said.

* Britain’s Lloyds TSB sealed a rescue takeover of HBOS to create a dominant mortgage and savings bank in a $22 billion deal helped through by a competition law change. 

Some financial firms, but not all, will be saved. The pattern was set with Bear Stearns in March and repeated with Fannie,  Freddie and AIG this month — but not Lehman Brothers. Information Arbitrage lays it out this morning here.

“Unwittingly or not, Treasury Secretary Paulson has effectively created the Paulson Doctrine. The doctrine states that firms that he deems too big to fail (but we’re not exactly sure where the line is drawn: LEH? No. BSC? Kind of. MER? Maybe. AIG, FNM and FRE? Definitely.) get the U.S. Government (and the U.S. taxpayer) as new senior shareholders, while the others are either left to execute an orderly private markets Good Bank/Bad Bank restructuring (if they can, like Mellon in the late 1980s) or a hurried Chapter 11 Good Bank/Bad Bank restructuring (if they can’t: see BCS/LEH circa 2008).

Sure, the headline reads that the Fed bailed out AIG, but was anyone other than Mr. Paulson pulling the strings? I doubt it. So what of this doctrine, and what does it mean for the global financial markets, the integrity of the U.S. regulatory regime and the U.S. taxpayer?

As for the Federal Reserve-backed rescue ofAIG, Reuters’ Emily Kaiser says that the “US central bank may have wiped out what credibility it won resisting Lehman Brothers’ rescue plea, and opened its door to countless other companies to come calling for cash.”

What do you make of the ‘Paulson Doctrine’?

Picture: Treasury Sec. Paulson/REUTERS/Paul Szep 

Tyler Cowen from the Marginal Revolution blog has a selection of old AIG commercials. Can you say foreshadowing?

“

The greatest risk is not taking one.”

“Debts are easy to fix, but liability is the nightmare.”

The stage is set for a protracted hostile takeover battle between South Korean electronics giant Samsung and flash memory storage maker SanDisk. Samsung offered about $6 billion for SanDisk, an amount that was nearly double its market value when the bid was made public. But SanDisk rebuffed the offer, saying the timing was opportunistic and that the price undervalued the company.

Is SanDisk justified in asking for a higher price? Its board says the $26 per share offered by Samsung is a 55 percent discount to the stock’s 52-week high. But since that $55.98 high last October, SanDisk shares have been on a downward spiral, losing more than three-quarters of their value since the beginning of the year due to a combination of oversupply in the memory chip market and concerns about consumer spending.

Caris & Co analyst Betsy Van Hees said in a note she was “disappointed and surprised by SNDK’s dismissal of the offer,” and believe the board is “looking in the rearview mirror through rose colored glasses.”

Van Hees said the memory market is worsening, consumer demand is slowing globally, and the future of negotiations on royalties that Samsung pays SanDisk to use some patented technology is uncertain. What’s more, she thinks a competing bid from rival Toshiba is unlikely, so SanDisk should take what it can get (and an 80 percent deal premium is a handsome one by all standards).

Sounds a bit like the Microsoft-Yahoo saga, doesn’t it, given the healthy deal premiums offered by both Microsoft and Samsung, and the strongly worded rejections by the founder-CEOs of both target companies.

But some analysts think Sandisk CEO Eli Harari is smart to hold out for a higher offer. Lazard Capital Markets analysts Daniel Amir and Lauren Stoller wrote in a research note that Samsung’s offer is “respectable, but not enough.” They argue that SanDisk’s stock is at a five-year low in the midst of a cyclical downturn in memory chip prices, so the actual value of SanDisk is higher. Amir and Stoller think SanDisk is gunning for a per-share price above $60, but they doubt Samsung will pay anything more than mid-$30s if it decides to sweeten its bid.

Here’s what could happen next: Samsung could raise its offer or take its bid directly to SanDisk investors, Toshiba or another white knight could step in with a counter-offer, or Samsung could walk away. Whatever it is, “SanDisk’s management will not sell easily” right now, as Cowen & Co analyst Daniel Berenbaum said.

“It’s very clear to me — we’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down,” Morgan Stanley Chief Executive John Mack told employees in a memo.

Ya think?

Morgan’s stock dropped 47 percent yesterday, and shorting investment banks has become the trade du jour. But it is odd for the head of a Wall Street investment bank to inveigh against short selling–hedge funds that bet on shares dropping are some of Morgan Stanley’s best customers. 

And Morgan Stanley itself was caught up in the debate over how to regulate and manage short selling a few years ago. It was one of 11 investment banks accused in 2006 of failing to deliver securities sold short by hedge funds – a service they made a healthy business of. Mack himself was named in an SEC investigation into the claims.

Today, new SEC rules on short selling come into effect that are aimed at forcing short sellers to be more transparent and responsible. Maybe they will have the desired effect. Then again, all this bellyaching about shorts may seem irrelevant if the $180 billion of global central bank support lifts markets in the coming days. 

Deals of the day:

* China’s CITIC Securities is not holding any talks on investing in Wall Street bank Morgan Stanley, a senior executive at CITIC Securities, the country’s largest brokerage, said.

* Britain’s Lloyds TSB sealed a rescue takeover of HBOS to create a dominant mortgage and savings bank in a $22 billion deal helped through by a competition law change.