Western Digital, Misunderstood Merger With Significant Upside And Limited Downside
Alex Zhao, CFA • 40 Comments
Alex Zhao, CFA • 40 Comments
Thu, May 12, 10:03 AM
- With the final approval in place from China's Ministry of Commerce, Western Digital (WDC +0.2%) today has closed on its acquisition of SanDisk (NASDAQ:SNDK).
- Debt financing has been consummated and funds released from escrow. SanDisk owners receive $67.50 in cash and 0.2387 shares of Western Digital for each of their SanDisk shares; SNDK closed yesterday at $76.18.
- The deal had previously cleared hurdles in the U.S., EU, Singapore, Japan, Taiwan, South Korea, South Africa and Turkey.
- Integration begins immediately with Steve Milligan continuing as CEO of Western Digital, while SanDisk co-founder, President and CEO Sanjay Mehrotra will join the WDC board.
- Now read Western Digital Stock Is A Contrarian Value Play »
Tue, May 10, 8:24 AM| Tue, May 10, 8:24 AM | 7 Comments
Mon, Mar. 14, 4:52 PM
- Western Digital (WDC -3.4%) had a rough day after Jefferies' James Kisner cut his target by $12 to $65, while arguing the pending SanDisk (SNDK -0.6%) acquisition and NAND flash market weakness (relevant to SanDisk's core businesses) will act as overhangs.
- Citi's Stanley Kovler downgraded SanDisk to Neutral due to the small arb spread that now exists relative to Western's buyout price, but also talked up the deal's potential and predicted shareholders will approve. He now expects $525M/year in synergies being achieved in the months following the deal's closing, and $1.145B/year by 2020.
- $750M of the 2020 synergies are expected to come from Western's ability to vertically integrate NAND flash via SanDisk, and $375M are expected to come from higher client SSD sales by Western to OEMs. $205M in "dis-synergies" are forecast related to customers choosing to limit the combined firm's market share.
- The notes come as Western begins marketing $18B worth of debt it's looking to raise to help pay for the SanDisk. The debt consists of $8.1B worth of bridge loans, $9B of term loans, and a $1B revolving credit line. Moody's has granted Western's debt a Ba1 (non-investment grade speculative) rating.
- Following a Tsinghua Unigroup subsidiary's decision to cancel a planned $3.8B investment in Western, SanDisk shareholders are due to receive $67.50 in cash and 0.2387 Western shares for each share they own.
Tue, Feb. 23, 8:09 AM
- The agreement for Unis to make a $3.775B equity investment in Western Digital (NASDAQ:WDC) is off after a decision by the Committee on Foreign Investment in the U.S. to investigate the proposed deal.
- Western Digital (WDC) reiterates its commitment to the purchase of SanDisk (NASDAQ:SNDK). Under the terms of that deal, SanDisk owners will receive $67.50 in cash and 0.2387 shares of WDC for each share of SanDisk they own. This values SanDisk at $78.50 per share based on last night's closing price.
- WDC is subject to a $184M break-up fee if it walks away from the purchase.
- WDC -8.9% to $42, SNDK -4.8% to $64.44 premarket
Mon, Feb. 22, 10:57 AM
- SanDisk (SNDK -1.1%) dropped 2% in the last few minutes on a Dow Jones report that Alken Asset Management, a key shareholder in Western Digital (NASDAQ:WDC), is opposing the company's $19B buyout of SanDisk due to its price.
- Alken, which owns about 2.2% of Western Digital, will vote against stock issuance that the company might need to wrap the deal, according to a letter to the board seen by The Wall Street Journal.
- Western Digital came to an agreement to acquire the flash storage maker in October.
Mon, Jan. 25, 3:08 PM
- Philips recently announced its has cancelled a $3.3B deal to sell an 80.1% stake in its Lumileds LED lighting unit to an Asian investment group led by Chinese fund GO Scale Capital. The cancellation follows objections from the Committee on Foreign Investment in the United States (CFIUS), and has sparked concerns about growing regulatory scrutiny of Chinese acquisitions - including deals in which the selling company isn't American.
- Synaptics (SYNA -8.1%), SanDisk (SNDK -11.1%), and Western Digital (WDC -4.5%) have all seen steep losses on a day the Nasdaq is down 0.6%. Synaptics soared last Wednesday after Bloomberg reported the company is getting closer to a deal to be purchased by a Chinese investment group for over $110/share.
- Western has a pending deal to sell a 15% stake to China's Unisplendour at a huge premium to current trading levels. The closing of that deal, meanwhile, affects the terms of Western's pending acquisition of SanDisk. Selling a 15% stake to a Chinese firm is, of course, is very different from allowing the firm to fully acquire a company.
- This morning, CLSA's Mark Heller downgraded SanDisk to Underperform, while citing weakening NAND fundamentals and the potential (given the selloff in Western's shares) for Unisplendour to walk away from the Western deal. He now sees a 25% chance the Western/SanDisk deal falls apart.
Mon, Jan. 25, 9:38 AM
- Citing higher deal risk and weakening NAND fundamentals, CLSA's Mark Heller has downgraded SanDisk (SNDK -1.6%) to Underperform, and cut his target by $16 to $70.
- Heller doesn't think weakening fundamentals will unravel Western Digital's (WDC -2.2%) pending cash/stock acquisition of SanDisk, but is worried about the potential for Tsinghua Unigroup subsidiary Unispendour to walk away from its deal to buy a 15% stake in Western for $92.50/share (107% above Western's Friday close).
- If Unisplendour was to walk away, Heller sees Western shareholders deciding on the SanDisk deal. The deal calls for Western to pay $85.10 in cash and issue 0.0176 shares for each SanDisk share provided the Unisplendour investment has closed prior to the acquisition. If it hasn't, the cash payout drops to $67.50, and the stock payout rises to 0.2387 shares. SanDisk currently trades below $67; deal closing has been forecast to occur in calendar Q3.
- Separately, Western has announced the purchase of over 100 IBM "patent assets" related to distributed storage, object storage, and non-volatile memory, as well as a cross-licensing deal with the IT giant; terms are undisclosed. Western says the purchase will augment an existing portfolio of 10K+ patents and patent applications.
- SanDisk's Q4 report arrives on Wednesday. Western's FQ2 report is due on Thursday.
Oct. 21, 2015, 9:32 AM
- Along with announcing a $19B deal to acquire SanDisk (SNDK +4.1%), Western Digital (WDC -2%) says it expects to report FQ1 revenue of $3.4B and EPS of $1.56 vs. a consensus of $3.28B and $1.56. Gross margin fell 90 bps Q/Q to 28.9%. With Seagate (STX -0.5%) having warned last week, the revenue outlook appears to confirm analyst suspicions Western gained enterprise hard drive share.
- Of Western's proposed $86.50/share payout to SanDisk, $85.10/share is in cash. The cash portion of the $86.50/share payout drops to $67.50/share if a planned investment in Western by Tsinghua Unigroup subsidiary Unisplendour (for a 15% stake) hasn't closed or is terminated.
- To help finance the deal, Western plans to obtain a whopping $18.4B worth of new debt facilities. It expects to continue paying its dividend, but will suspend its buyback program.
- Cost synergies are expected to reach a $500M/year run rate within 18 months; the deal is expected to be accretive to EPS within 12 months of closing (not surprising given it's mostly in cash). SanDisk's NAND flash manufacturing JV with Toshiba will be maintained.
- By acquiring SanDisk's NAND chip, controller, and SSD IP, and by gaining the ability to source NAND at cost, Western effectively neutralizes the cannibalization threat posed by SSDs/flash storage to its hard drive ops. For now, Seagate continues to rely on 3rd-party flash manufacturers; an alliance with Micron was formed in February.
- SanDisk is trading roughly 10% below Western's offer price.
Oct. 21, 2015, 8:00 AM
- SanDisk (NASDAQ:SNDK) +5.2% premarket after agreeing to be acquired by Western Digital (NASDAQ:WDC) in a cash and stock deal valued at ~$19B, confirming earlier speculation.
- The $86.50/share offer represents a 15% premium to yesterday's closing price for SNDK.
- WDC says the acquisition will double its market and expand its participation in higher-growth segments, and enable it to vertically integrate into NAND; CEO Steve Milligan will continue to serve as CEO of the combined company.
- WDC -3.1% premarket.
- Earlier: SanDisk beats by $0.29, beats on revenue
Oct. 19, 2015, 4:42 PM
- Six days after reporting SanDisk (NASDAQ:SNDK) has talked with Micron (NASDAQ:MU) and Western Digital (NASDAQ:WDC) about a potential sale, Bloomberg reports SanDisk is in advanced sale talks with Western.
- Negotiations are said to have "accelerated" over the weekend. A deal could be reached as soon as this week.
- Western has been viewed by analysts as a smoother fit than Micron, given it's not currently a NAND flash manufacturer - with many thinking Western needs to become one to insure itself against hard drive cannibalization by SSDs - and SanDisk and Micron respectively having NAND alliances with Toshiba and Intel.
- SNDK +8.3% after hours. WDC -3.1%. MU -1.3%. Micron joined SanDisk in rallying last week following Bloomberg's original report, fueled by expectations a deal would improve Micron's NAND scale and IP, and potentially lead to more favorable industry pricing.
- Earlier today: SanDisk gains following Korean site's M&A report
Oct. 19, 2015, 9:56 AM
- BusinessKorea reports Samsung has concluded a full-blown acquisition of SanDisk (NASDAQ:SNDK) isn't in its interests, but adds the Korean tech/electronics giant is "keeping a close eye on the unfolding situation." It also states China's Tsinghua Unigroup has shown an interest in buying SanDisk along with previously-reported Micron and Western Digital.
- Samsung dropped a $5.85B bid to acquire SanDisk in 2008. Making a fresh bid would likely draw intense antitrust scrutiny, given Samsung is the NAND flash market's largest player and could see its share near 50% if it bought SanDisk. Likewise, U.S. regulators could object to SanDisk being acquired by a Chinese firm such as Tsinghua; there was recently a quick political backlash to reports Tsinghua had bid for Micron.
- SanDisk is adding to the big gains seen last week after Bloomberg reported talks have been held with Micron and Western. Q3 results arrive on Wednesday afternoon.
Oct. 19, 2015, 9:18 AM
- More than three years after Western Digital (NASDAQ:WDC) closed its acquisition of Hitachi's hard drive unit (HGST), China's Ministry of Commerce has approved integrating the business with Western Digital proper.
- The company will continue selling products under both the HGST and Western Digital brands, and maintain separate sales teams for two years. However, it plans to start integrating "corporate and other key functions, including [R&D], heads and media operations, engineering and manufacturing."
- HGST president Mike Cordano has been appointed to the newly-created position of COO. Western president Jim Murphy will now run the company's storage devices unit.
- Western is up 3.6% premarket. Archrival Seagate (NASDAQ:STX), hit hard last week by an FQ1 warning that some analysts argued indicates enterprise share loss to Western, is down 1.2%.
- Update (10:39AM ET): Western has given back its early gains. Seagate is down 2%.
Oct. 13, 2015, 5:07 PM
- Sources tell Bloomberg SanDisk (NASDAQ:SNDK) is in talks with Micron (NASDAQ:MU) and Western Digital (NASDAQ:WDC) about a possible acquisition. No decision has been made.
- Acquiring SanDisk, which partners closely with Toshiba (OTCPK:TOSBF) on NAND flash manufacturing, would turn Micron (NAND partnership with Intel) into a heavyweight within the NAND market - Samsung and SanDisk/Toshiba are currently the market's biggest players. Micron received 32% of its August quarter revenue from flash, and 60% from DRAM. The company has been betting on 3D NAND and 3D XPoint to strengthen its flash position.
- Western has made several smaller flash-related acquisitions, as it tries to offset the gradual encroachment of SSDs/flash storage on hard drives. However, none of the buyout targets were comparable in scale to SanDisk, and Western still depends on 3rd-party NAND suppliers who also compete with the company in the SSD market.
- SanDisk +11.5% after hours to $68.90. Micron +2.6% to $18.65. Western +0.8% to $85.00.
- Earlier: SanDisk jumps on reported sale effort
Oct. 13, 2015, 4:26 PM
- Bloomberg reports SanDisk (NASDAQ:SNDK) is working with a banker to explore a potential sale.
- SanDisk and (to a lesser extent) Micron (NASDAQ:MU) have risen after hours. Numerous chipmakers have been acquired over the last two years as the industry consolidates; SanDisk would be one of the biggest if a deal occurred.
- The chairman of China's Tsinghua Unigroup (previously bid for Micron) recently suggested his company wants to be a NAND flash manufacturer, but added it's uninterested in buying SanDisk, Toshiba, or SK Hynix (assuming regulators would allow it).
- Update: Bloomberg's sources state SanDisk has held buyout talks with Micron and Western Digital.
Jul. 14, 2015, 9:48 AM
- SanDisk (NASDAQ:SNDK) has caught a bid after the WSJ reported NAND flash rival/DRAM giant Micron (up 8.6%) has received a $23B buyout offer from China's Tsinghua Unigroup.
- As with Micron, any potential buyout offer for SanDisk from a Chinese firm would be closely studied by regulators. There has previously been speculation U.S. hard drive giant Western Digital could bid for SanDisk.
- Q2 results arrive on July 22. Shares -43% YTD.
May 27, 2015, 3:00 PM
- Chip stocks are posting outsized gains (SOXX +4%) amid a 1.3% increase for the Nasdaq after the WSJ reported Avago and Broadcom are in advanced merger talks, sparking hopes for further M&A.
- A Broadcom/Avago deal would be worth ~$67B at current valuations, easily making it the largest in the chip industry's breathless consolidation wave. It would also touch markets ranging from smartphones to set-tops to servers to switches/routers.
- Notable gainers include Avago RF chip peers Skyworks (SWKS +4.3%), Qorvo (QRVO +3.2%), and Anadigics (ANAD +4.9%). Others include Micron (MU +3.8%), SanDisk (SNDK +4.3%), NXP (NXPI +3.5%), Silicon Motion (SIMO +8.3%), Cirrus Logic (CRUS +4.8%), STMicroelectronics, (STM +3.4%), Synaptics (SYNA +3.4%), Atmel (ATML +2.8%), Cavium (CAVM +4.5%), Intersil (ISIL +4.6%), Semtech (SMTC +3.9%), ON Semi (ON +3.8%), Microsemi (MSCC +4.4%), and IDT (IDTI +4.2%).
- Non-chipmakers tied to the industry are also doing well. Standouts include ARM (ARMH +4.4%), Amkor (AMKR +4.6%), ASML (ASML +3.1%), and Rambus (RMBS +3.3%).
- Chip ETFs: SMH, XSD, PSI, SOXL, USD, SOXS, SSG