While SanDisk (SNDK) shares continue to trade sharply higher after Samsung said it is considering making a bid for the company, some analysts are cautioning that the notion of merging the two companies is far from a sure thing, and would involve substantial complications.

Craig Ellis, an analyst with Citigroup, says he’s skeptical that Samsung would really want to buy the company, and finds the probability of a deal to be “low.” He notes that a deal would put an end to Samsung’s royalty payments to SanDisk for NAND flash, which he sees at $414 million in 2008, $309 million nextyear and $215 million in 2010; and it would provide Samsung with system memory patents on which SanDisk generates substantial royalties. It would also give them a huge share of the NAND manufacturing market - Ellis says Samsung now has 38% of worldwide capacity, with SanDisk at about 16%.

But Ellis notes that pushing its manufacturing share that high will raise antitrust concerns. He also says that Samsung in the past has not been interested in the retail card market, where SanDisk is a major player. He notes that Samsung already has a lead on SanDisk in the solid-state drive sector. And He wonders if Samsung is simply engaging in “a due diligence fishing trip” ahead of the renegotiation of royalty rates a year from now.

Cowen’s Daniel Berenbaum
likewise writes today that he is “somewhat skeptical” that a deal makes economic or strategic sense for Samsung. “We’re not sure why Samsung needs SanDisk,” he writes. “It’s also not clear that SanDisk is a willing seller.” One key issue, he notes, is how a combination would affect SanDisk’s current manufacturing joint venture with Toshiba. And he notes that Samsung has limited experience in big acquisitions, particularly foreign ones.

Goldman Sachs analyst James Covello
says a deal would make sense - he contends that the royalty stream Samsung is paying to SanDisk is worth $4 billion to $5 billion, well above SanDisk’s current $3 billion market cap. And he notes a deal would result in Samsung getting royalties on the same set of patents from Hynix and potentially from Micron (MU). But he also notes that the Toshiba situation could be an obstacle, “as there could be a change of control provision in the JV agreement that stipulates Toshiba has to be compensated if the ownership structure of the JV were to change.”

And one other thing: Merrill Lynch convertible analyst Alan Yu notes today that a SanDisk takeover by Samsung would likely trigger the change-of-control provision of SNDK’s 1% convertible due 2013. That provision would allow holders yo put the convert back to the company and demand payment at par plus accumulated interest. They advise investors looking to play the deal to swap out of the equity and into the coverts.

SNDK is up $3.94, or 29.3%, to $17.40.