Western Digital to Split in Two After Kioxia Bid Fails

Brody Ford
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(Bloomberg) -- Western Digital Corp. will split into two separate, publicly traded companies after talks to merge with Kioxia Holdings Corp. fell apart.

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The storage maker will spin off its flash business, which focuses on memory for computers, devices and portable drives, it said in a statement Monday alongside fiscal first-quarter earnings. The company’s remaining HDD business will focus on selling high-capacity memory to cloud data centers.

Shares rose as much as 13% on the news, their most since May 2022.

Splitting the two divisions could be a valuable long-term strategy for Western Digital, which had tried for years to combine with Japanese storage maker Kioxia in a bid to bolster its flash business and better compete with Samsung Electronics Co. Discussions were stymied over issues of control, leadership, economics and politics, and the deal ultimately fell apart after an indirect shareholder in Kioxia, SK Hynix Inc., said it wouldn’t support a merger.

The split will also help HDD, which has struggled over the last year with the cloud computing industry, post more-consistent earnings, the company said in an investor presentation. The HDD business will retain the Western Digital name, Chief Executive Officer David Goeckeler said, with the flash business having a different, yet-to-be-announced brand.

The split is planned for the second half of 2024, and Western Digital will likely hold an investor event closer to the separation to share more details, the company said. The move is intended to be structured in a tax-free manner, it said.

“After fully evaluating a comprehensive range of alternatives, the Western Digital management team and board has determined that spinning off its Flash business is the best executable alternative at this time,” Goeckeler said during an investor call Monday.

The company’s shares had slipped about 14% this month following uncertainty around the Kioxia deal. This “Plan B” option to spin off its flash business “may be the best possible outcome to maximize shareholder value after Kioxia’s failed bid,” Bloomberg Intelligence analyst Woo Jin Ho wrote in a note.

The HDD and flash businesses each account for about half of Western Digital’s total revenue, according to company filings, though the Flash business is expected to grow more rapidly in the coming years, driven by industries like gaming. The unit has higher capital requirements for future “key investments,” the company said.

Western Digital now can be seen as a more-realistic long-term investment rather than as “a conglomerate being mismanaged,” Mizuho analyst Jordan Klein wrote in a note.

The news came alongside the company’s results for the fiscal first quarter. It reported net revenue of $2.75 billion, a 26% drop from the same period a year prior, though still slightly better than expected by analysts. Its flash business declined 9.6% to $1.56 billion while its HDD unit declined 40.7% to $1.2 billion.

“Western Digital’s planned split of its hard disk drive (HDD) and Flash businesses overshadows encouraging, but mixed, fiscal 1Q sales,” Bloomberg Intelligence’s Ho wrote. “The move should maximize shareholder value, and the calendar 2H24 timing may work out in Western Digital’s favor, given 1Q results may have been the bottom for both segments.”

Activist investor Elliott Investment Management urged Western Digital to make this move in May 2022. In a statement Monday, the hedge fund said it supports the decision, and “will provide Western Digital with strategic flexibility for future value creation.”

--With assistance from Ian King.

(Updates with shares in third paragraph, additional details throughout from fourth paragraph)

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