Analysis: the Western Digital SanDisk buy

WD-LogoThe semiconductor industry’s rapid consolidation proceeded apace as Western Digital agreed to buy SanDisk today for $19 Billion. SanDisk had been shopping itself to potential buyers which also include Micron Technology Inc. The offer values SanDisk [SNDK} at $86.50 a share, a 15% premium on Tuesday’s market close. SanDisk shares rose 5.7% to $79.50 prior to market open – the same shares were trading under $60 a share before rumors spread concerning the firms potential sale.

Western Digital shares dropped 2.5% to $73 in premarket trading having lost nearly a third of their value so far this year. Ironically, both companies reported better-than-expected results for their latest quarters this morning.

The acquisition comes just three weeks after China’s Tsinghua Unigroup Ltd. agreed to pay $3.78 billion for a 15% stake in Western Digital, the latest U.S. tech company scrambling for politically connected (capital source) Chinese partners.

Under the deal Western Digital said it would pay $85.10 a share in cash and 0.0176 shares in stock for each share of SanDisk if the Tsinghua investment closes first. If that deal hasn’t closed or has been canceled, it will pay $67.50 in cash and 0.2387 shares.

SanDisk has missed their earnings estimates for the last three quarters and according to downgrades by market analysts appears to be suffering from poor execution on a number of fronts:

  • Loss of Apple’s SSD business
  • A too optimistic Enterprise strategy – missing 2TB SATA drive solution
  • Poor integration of the Fusion I/O acquisition
  • 3D NAND migration uncertainty – late entry position
  • High margin retail business is slowing
  • SanDisk must renegotiate licensing revenue with Samsung (Aug-16, now 40% EPS)
  • Poor inventory management
  • SanDisk granted 5 U.S. patents last year

Steve Milligan Western Digital CEO will become chief executive of the combined company, located at Western Digital’s base in Irvine, Calif. SanDisk’s CEO Sanjay Mehrotra is expected to join the Western Digital board after the deal closes.

Western Digital expects the deal to add to earnings within 12 months of closing, and will achieve annual synergies of $500 million within 18 months.

TechEye Take

These are tough times in the memory sector. Company’s like SanDisk have been facing increasing price pressures over the last six months that have limited their ability to establish a better than break-even proposition going forward. SanDisk expanded into areas that it was ill equipped to manage ending in their distressed selloff to WD.

Western Digital has been in the process of designing a proprietary non-volatile memory and recently picked up technical people from the failed Contour Semiconductor. SanDisk has lost new product design momentum relying on (from what we can tell) their partner Toshiba to perform the heavy lifting.

Toshiba is having their own set of issues with accounting problems; resignation of the CEO and several board members; and are building a new fab making one wonder why in the world would anyone invest in this mess? Evidently WD has seen a way through. Toshiba seems to be absent from this conversation…., ?