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Was Western Digital's $19 Billion for SanDisk a Bad Decision?

Sejuti Banerjea

Hard disk makers Western Digital WDC and Seagate Technologies STX have dominated the market for storage devices forever. But new non-volatile memory (NVM) technologies threatened to shake this position mainly because they could minimize latency and reduce wear and tear. The only thing checking the rapid transition to these technologies is cost and manufacturers have been working on that angle.

For the leading storage vendors to retain their leading positions, they need to be able to offer the most advanced technologies. This is what led to the purchase of SanDisk, which along with JV partner Toshiba, was one of the companies at the leading edge.

You can hardly fault the thinking behind the acquisition, and for the most part, analysts agreed that it placed WDC ahead of STX in the innovation race.

But the story didn’t end there. Toshiba was having problems of its own, mainly from cost overruns and accounting irregularities in its Westinghouse nuclear power business, with the resultant losses forcing it to think about selling its share in the WDC JV. (Read more: Why Suitors Are Flocking To Toshiba’s Chip Business)

This however put Western Digital in a difficult position because it would never do to lose Toshiba’s technology and operations to a competitor. At the same time, the company took on a whole lot of debt to buy SanDisk making it that much more difficult for it to raise additional debt to pay for Toshiba’s share.

It’s unlikely that Toshiba is opposed to the idea of selling to WDC, but the company needs just as much cash as it can get, which is where WDC falls short. Broadcom AVGO, Foxconn, Apple AAPL, Softbank or other investors will likely shell out much more. As a result, despite WDC’s attempts to come to an understanding with Toshiba, the latter has preferred other vendors and threatened to take all necessary measures to force it to get out of the way. Toshiba’s GM of legal affairs has also claimed that WDC had failed to sign important JV agreements, without which it would be prevented from entering the JV premises.

So at the moment, Western Digital insists it has rights, while Toshiba insists that the JV agreement doesn’t give the right to either party to block the other from selling its share. It also pointed out that WDC itself bought SanDisk without seeking or receiving Toshiba’s approval.

Interestingly though, Reuters reported at the time that Western Digital was satisfied that Toshiba, which had some rights that could block a deal, had supported it. Moreover, Toshiba spokeswoman Midori Hara had said in an email that the deal would not have a negative impact on the JV.

To conclude, it appears that WDC has some rights that haven’t been regularized by the signing of necessary documents. Whether this was an oversight or procrastination or on the consideration that those papers limited its rights, is an open question given the paucity of publicly available information.

Western Digital currently has a Zacks Rank #1 (Strong Buy). See the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

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