Chinese-government controlled Tsinghua Unigroup has been in the news lately for its attempted purchase of Micron, which was reportedly rebuffed due to an almost certain denial by US CFIUS (Federal Committee on Foreign Investment) officials on national security grounds. Now the company is back in the news, as its Unisplendour (Unis) Corporation subsidiary (publicly traded) is buying its way into Western Digital by purchasing a 15 percent stake in the company for $3.775 billion.
Unis is paying $92.50 per share (newly issued), which is a roughly 33 percent premium over the existing stock price of $68.87. The struggling WD giant, which has suffered a loss in revenue for seven of the previous nine quarters, initially experienced a sharp 15 percent jump in its stock price after the announcement, but it has now leveled off at $77 per share.
This investment is good for Western Digital for a number of reasons, and it all starts with cash flow. The cash injection can fund any number of projects, and the company indicated in its press release that the company will use the investment, in part, to pursue long-term strategic growth opportunities. WD has already been on a shopping spree as it infuses its HGST subsidiary with several key flash-based acquisitions, such as Virident, STEC and Skyera. These acquisitions will help WD weather the SSD storm as HDDs slowly give ground to flash-based storage for performance workloads.
However, these prior purchases are of companies that produce the end SSD products, but not the NAND. NAND is the most important part of an SSD, and the cost advantage of producing one’s own NAND is essentially unbeatable by any third-party SSD manufacturer because it is the most expensive component of an SSD.
There has been a swirl of industry rumors that both SanDisk (which is under duress due to poor performance) and Micron (which was previously bid upon by Unis’ parent company) are considered takeover targets by either WD or Seagate. Tsinghua Unigroup’s prior bid to purchase Micron fell flat, but there is no doubt that the company has interest in purchasing a memory foundry. Some are speculating that the WD purchase can serve as another avenue for Tsinghua to work its way into a foundry purchase, but that remains to be seen.
Seagate recently entered into a strategic alliance with Micron to share technology and grant it guaranteed access to Micron NAND. This addresses one of Seagate’s key needs, and makes it questionable that WD will move forward with a purchase of Micron. The eyes turn to SanDisk as WD looks to complete its flash arsenal, but only time will tell the result of WD’s professed intention to strengthen its portfolio.
Another strategic reason for WD to enter into the Unis agreement stems from regulatory approval of its HGST acquisition. WD and HGST have been operating as independent companies while they await MOFCOM (China’s Ministry of Commerce) regulatory approval, which unfortunately results in production, engineering, sales, marketing, and administrative (among other) redundancies at WD and HGST. After MOFCOM approval, the marriage of the two companies will be complete, saving WD billions of dollars as it removes the redundancies and consolidates portfolios.
Western Digital stated that the MOFCOM regulatory approval is not related to the announcement, but China has been very vocal that it is trying to increase its own national security by attaining key technology production capabilities, including its pledge to invest $163 billion over the next five years in semiconductor technology. Many are speculating that the Tsinghua Unigroup integration will likely grease the wheels enough to gain the long-overdue regulatory approval for the WD/HGST merger.
The WD/Unis deal will still be subject to regulatory approval from the United States, but it will likely not face serious CFIUS restrictions due to the structure of the agreement (because it does not include a controlling stake in WD). Unis will have the right to nominate one representative to the WD board of directors, but will be subject to a five-year position standstill and voting restrictions.
As a side note, Intel invested $1.5 billion in Unis in September 2014, and Unis is also seeking a $2.3 billion acquisition of 51 percent of HP’s H3C business.
The merger will have long-term implications for the storage industry as a whole, especially as WD decides what acquisitions to pursue with the infusion of cash. WD expects the transaction to close late this year, or in the first quarter of 2016.
