Yottabytes: Storage and Disaster Recovery

Oct 28 2015   8:02PM GMT

More on the Western Digital-SanDisk Dynastic Marriage

Sharon Fisher Sharon Fisher Profile: Sharon Fisher

western digital

Back in the day, kings used to forestall a potential war from another country by marriage. Thus merged, the theory went, the countries would henceforth work together instead of competing.

In the computer industry, that’s not really an option. This is why we’re seeing alliances like the merger of hard disk powerhouse Western Digital with solid state size queen SanDisk, announced last week after having been rumored earlier this month.

Western Digital, which has to have been getting itchy because it hasn’t bought anybody major in a while, was also facing a problem in that it had pretty much bought everyone who’d hold still for it in the hard disk space this decade. (They weren’t alone. Seagate bought Samsung storage, and Toshiba bought Fujitsu storage.)

True, Western Digital could always have bought Seagate itself, or vice versa, but eventually the Federal Trade Commission would start finding all these computer storage mergers to be monopolistic. As it is, when Western Digital bought Hitachi GST in March, 2012, it had to sell off some pieces first. For example, it sold to Toshiba assets that Hitachi GST used to make and sell desktop hard- disk drives. In addition, the European Commission required Western Digital to sell one of Hitachi’s 3.5-inch manufacturing plants and associated intellectual property for making these drives. In return, Western Digital received a Toshiba plant that had been damaged in last year’s Thai floods.

And why haven’t either Western Digital or Seagate bought Toshiba, anyway? “When Western Digital’s leadership gets comfortable with this new partnership, I wouldn’t be surprised to see it develop into yet another hard-drive buyout,” agrees The Fool’s Anders Bylund. “If Western Digital doesn’t own Toshiba’s hard drive operations by 2018, I’ll be shocked.”

In fact, this deal hinges on whether Toshiba approves, writes Reuters. “Any deal with SanDisk will require a sign off from Toshiba . SanDisk uses Toshiba’s foundries to make its chips and the two have an important intellectual property-sharing joint venture,” writes Reuters. “Analysts have said Toshiba is more likely to accept Western Digital as a buyer for SanDisk than Micron, a rival memory chip maker.”

In any event, Sandisk, while not as profligate a shopper as Western Digital, had had its own share of acquisitions over the years, such as Fusion-io and SMART Storage Systems. It was generally considered to be third in the NAND flash memory market after Samsung and Toshiba. It was also just ahead of Micron, which had also been suggested as a potential Sandisk acquirer.

According to Leo Sun at The Motley Fool, Western Digital was the leader of the hard disk drive market, holding 43 percent market share. Assuming the acquisition completes, it will then control 14 percent of the SSD market, including Sandisk’s 11 percent, ranking it second after Samsung.

That said, Sun is wondering whether Western Digital is paying too much. The $19 billion total calls for an $86.50 purchase price — $85.10 in cash and the rest in stock. But if a planned 15 percent investment in WD by Tsinghua Unigroup subsidiary Unisplendour doesn’t go through, the cash portion of the deal will drop to $67.50 per share. “WD’s offer of $86.50 per share values SanDisk at nearly 35 times trailing earnings, compared to the industry average P/E of 15 for the data storage industry.”

On the other hand, for several reasons, buying Sandisk now was cheaper and more manageable than waiting, Sun writes. For that matter, there’s a potential class action lawsuit brewing because Western Digital isn’t paying enough with its 15 percent premium. Plus, sales on both the Western Digital and Sandisk side are slowing. “A slowing business buying another slowing business at a hefty price tag doesn’t sound all that appealing to Western Digital shareholders,” writes The Fool’s Evan Niu.

Incidentally, Unisplendour’s parent company also proposed investing in Micron a while back. (Honestly, keeping track of all this is like Game of Thrones.) After some unease about the plan due to a Chinese company investing in an American chipmaker, perhaps that’s why Unisplendour is taking this circuitous route toward investing in a different American chipmaker.

Anyway, if approved and all the various contingencies fall into place, the deal is expected to close in the third quarter of 2016. A whole fistful of financial and legal companies are involved, because of the complexities and how much debt will be involved.

4  Comments on this Post

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  • calypsojoe
    Sorry but this is a pretty superficial reading of the merger. Full disclosure: I'm not a fan of the pairing. But your article is the thinnest of skims. Did you do any real research before sitting down to write this post? With all due respect, this is embarrassingly lame. 
    10 pointsBadges:
  • Sharon Fisher
    I'm certainly interested in hearing your perspective.
    9,745 pointsBadges:
  • JamesMassey
    Dear Calypsojoe:  I liked and laughed when I read your comment.  Tech analysis can get very deep, very fast.  I grapple daily with the topic of too much complexity and the costs and feasibility to reduce it to a simplification.  I am inventing graphic symbols to hold rich insights, facts, patterns and analysis.  In my opinion, this is needed to grasp (as a reader and/or as a writer) today's complex tech worlds.  Sharon easily could have gotten too deep, too fast and lost 90+% of her readers.  One solution is a "look ahead" feature that classifies the complexity of the text copy (narrative).  In this way, the reader can choose to go there are not.
    60 pointsBadges:
  • JamesMassey
    Dear C: your message reminds me of a semiconductor writer analyzing an Intel strategic investment.  While i was fascinated by the rich, elaborate, goings-on that the written brought up and dealt with in many strategic vectors, I was aware that over 50% of what he talked about, I have no knowledge of.... and I have 40 years in computer automation.... after training in a high tech think tank on R&D.  So, what does a less technically competent do with that kind of writing?  To me it is like posting a link to a video.  The smart people (namely Tim O'Reilly at O'Reilly Publishing) post how many minutes the video is, so the reader has a clue to their time investment they are committing to.  In complex tech articles the writer needs to warn the reader what they are in for if they choose such and such a part of the article.
    60 pointsBadges:

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