Elliott Opposes Lexar Offer by Micron

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, [phone], cell - [phone]

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