Western Digital (ticker: WDC) has decided to terminate discussions with its joint-venture partner Kioxia regarding the merger of their flash memory businesses, leading to a sharp decline in the company's shares.
An Overview of Western Digital's Businesses
As a leading technology company, Western Digital operates in two primary sectors: disk drives and flash memory products. The acquisition of SanDisk for $19 billion in 2016 allowed Western Digital to enter the flash memory industry. It now shares production facilities with Kioxia, a Japanese company that was previously a division of Toshiba. While Toshiba currently retains slightly over 40% ownership, the majority is held by a consortium of investors led by Bain Capital.
The Potential Transaction and Activist Pressure
For several months, there have been ongoing reports about Western Digital and Kioxia discussing a transaction to combine their flash memory businesses while separating them from the disk drive operations. One of the notable pressures has come from Elliott Management, an activist investment firm, which has urged Western Digital to divest its flash business since May 2022. In response, Western Digital agreed to explore possible strategic transactions.
Negotiations Reach an Impasse
Citing undisclosed sources, Nikkei Asia reported that negotiations between Western Digital and Kioxia have reached an impasse. Allegedly, Western Digital informed Kioxia about its withdrawal from the talks following the lack of support from SK Hynix, a Korean chip maker that forms part of the Bain Capital consortium holding a controlling stake in Kioxia.
No Immediate Comment from Kioxia or Western Digital
At present, both Kioxia and Western Digital have refrained from commenting on the matter in response to a request for clarification.
Western Digital Deal with Kioxia Opposed by Hynix
During a recent conference call with investors, Hynix expressed its opposition to the proposed combination with Kioxia. A Hynix official stated that they are not agreeing to the deal at this time due to the potential impact on the value of their investment in Kioxia. However, they were unable to disclose specific reasons or comment further due to a confidentiality agreement with Bain.
Uncertainty Surrounding Western Digital's Future
Despite Hynix's stance, Wall Street analysts believe that the structure of Western Digital will eventually undergo some form of change, regardless of whether the deal with Kioxia proceeds or not.
Wells Fargo analyst Aaron Rakers expressed uncertainty regarding the status of the deal, suggesting that it may have been delayed rather than completely off the table. He emphasized that they still anticipate a structural move as a result of Western Digital's ongoing strategic review process.
Value Creation from Potential Deal
Wedbush analyst Matt Bryson shares a similar perspective, highlighting that the main catalyst for value creation from a deal would be the splitting of Western Digital's NAND and HDD businesses. He believes that this is more impactful than the combination with Kioxia's flash business.
Bryson also noted that with Elliott and Apollo still invested in Western Digital, there is a significant probability that the strategic review will ultimately lead to a split of Western Digital's businesses, regardless of the Kioxia agreement. This outcome is expected to create substantial value for shareholders.
Currently, Western Digital shares are experiencing an 11% decrease in value, trading at $37.69 in the afternoon session.