What: Shares of semiconductor probe cards maker FormFactor fell as much as 15% on Tuesday morning on very heavy trading volume. The big swing appears to be a reaction to rumors of major FormFactor customer Micron Technology exploring a sale to Chinese tech giant Tsinghua Unigroup.
So what: FormFactor's chip testing tools are an important piece of Micron's manufacturing workflow. Micron represented 15% of FormFactor's sales volume in 2014, up from 12% in 2013. If that company moves under the control of a Chinese conglomerate with its own preferences and supply chains, FormFactor could lose its third-largest customer. That's never good news.
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FormFactor's future depends on chip builders needing these wafer probes. Image source: FormFactor.
Now what: The Micron risk is real, but there are plenty of not-too-solid assumptions baked into this price drop. If any one of these expectations turn out to be false, FormFactor shares should recover quickly.
In particular, Micron is not very likely to go Chinese. Tsinghua's offer is almost embarrassingly low and very likely to be turned down by Micron's shareholders. And that's only if the bid gets past regulatory reviews, which is hardly guaranteed when a Chinese company looks to spend $25 billion to take over an all-American business.
Furthermore, if Micron accepts the Tsinghua bid and the deal overcomes a plethora of hurdles, the company may still stick with the FormFactor tools it already knows.
FormFactor lists consolidation in the semiconductor industry as a major business risk, and investors are taking that warning seriously today. Just a bit too seriously, in my opinion. This drop is not likely to last, especially is Micron's reported deal evaporizes.
The article Why FormFactor, Inc. Stock Fell As Much As 15% Today originally appeared on Fool.com.
Anders Bylund owns shares of Micron Technology. The Motley Fool recommends FormFactor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.