Western Digital's (WDC +1.64%) lengthy battle over Toshiba's (TOSBF +0.00%) memory unit seemingly ended on Sep. 20, with Toshiba's board voting to sell the business to a consortium led by SK Hynix and Bain Capital for about $18 billion. Western Digital stated that it was "disappointed" in Toshiba's decision, and insisted that it violated contractual agreements with its subsidiary SanDisk.
Previously on Western Digital vs. Toshiba...
At the heart of this conflict is a NAND joint venture between Toshiba and SanDisk that Western Digital acquired for $15.8 billion last year. Shortly afterwards, Toshiba decided to sell its entire memory chip business to offset massive losses as its US nuclear division. WD opposed the sale, stating that it violated JV agreements between SanDisk and Toshiba. Toshiba then sued WD for allegedly interfering with the bidding process.
Image source: Getty Images.
Western Digital couldn't purchase the entire memory unit on its own after the SanDisk deal, so it assembled a consortium to make an offer. That group included private equity firm KKR and the state-backed Network Corp. of Japan and Development Bank of Japan. The consortium's final bid was reportedly $17.4 billion, with WD offering $1.3 billion of that total in convertible bonds.
However, two other rival consortiums emerged -- one led by SK Hynix and Bain, and another led by Foxconn. Apple (AAPL +0.00%), which previously warned WD against interfering with the bid process, joined SK Hynix and Bain, which seemingly turned the tide against WD and Foxconn. The deal hasn't been finalized yet, but WD shares fell nearly 4% after the announcement.
Why Western Digital investors were disappointed
Before acquiring SanDisk, Western Digital was primarily known as the world's largest manufacturer of traditional platter-based HDDs (hard disk drives). That market was gradually being cannibalized by pricier NAND-based SSDs (solid-state drives), which were faster, consumed less power, and were less prone to damage than HDDs.
But after buying SanDisk, Western Digital became the third largest manufacturer of NAND chips in the world after Samsung (NASDAQOTH: SSNLF) and Toshiba. Its streak of negative revenue growth finally ended, and analysts now expect its revenue and earnings to respectively rise 6% and 36% this year.
2017 YTD NAND Market Shares. Data source: ChinaFlashMarket. Chart by author.
If its consortium had won the Toshiba bid, Western Digital could potentially have become the second largest NAND maker in the world. That scale would have allowed it to compete more effectively against Samsung in terms of capacity and pricing. It would also have been a sound long-term investment, since the global NAND market could grow from $40 billion this year to $65 billion by 2020, according to research firm ChinaFlashMarket.
But with SK Hynix now gaining a slice of Toshiba's memory business, the South Korean tech giant could scale up and become a bigger threat to slightly larger players like WD and Micron (MU 0.23%). This means that WD's NAND margins could get squeezed in the near future.
But Western Digital isn't giving up yet...
Toshiba's decision to go with SK Hynix and Bain represents a significant blow to Western Digital, but the company isn't giving up yet. The company recently filed for arbitration against Toshiba through the ICC International Court of Arbitration, claiming that Toshiba shouldn't be allowed to invest in a new flash memory production line in Japan unless SanDisk was also allowed to participate.
Western Digital can also cite a ruling in a California court in July, which states that Toshiba must give SanDisk a two-week notice before closing any transfer of their joint venture interests to mull its legal options. In other words, Western Digital isn't going down without a fight.
But for now, investors shouldn't let those legal battles overshadow the fact that WD is still pretty cheap at seven times next year's earnings, and it pays a decent dividend yield of 2.2% to patient investors.
