Comment Against reports of a nearing merger of Western Digital and Kioxia, B&F is reviewing the implications and some of the difficulties that could lie ahead in such a deal.
The Bloomberg report claims the two are working towards a combined business based on Kioxia’s operation and a spun-off Western Digital SSD business. It would own the fab plants operated by the existing Kioxia-Western Digital joint venture, and build and sell SSDs using the fabs’ NAND chips. The new business would have a US stock market listing and also one in Japan, thus placating Japanese national interest in having a national NAND semiconductor business.
Western Digital (WD) management would run the cobined business, according to Bloomberg’s report. In our estimations, a WD exec could be the CEO with a Kioxia chairman or perhaps a couple of co-CEOs. There would have to be, B&F thinks, visible involvement with real operational influence to gain Kioxia exec buy-in.
WD is in an interesting position as it is involved in a strategic review of its business with its two SSD and hard disk drive units. This is as a result of involvement from activist investor Elliott Management. As we understand it, Elliott believes the WD stock price, which is roughly equivalent to that of its disk drive competitor Seagate, effectively undervalues its SSD business. By separating the HDD and SSD business units, each could have its own stock market listing and the sum of the two business’s share prices would exceed WD’s current capitalization, giving investors a good return on their WD shares.
If a split happens then the two business unit execs, Robert Soderbery and Ashley Gorakhpurwalla, would not necessarily be the CEOs of the resulting Kioxia+WD SSD business and the WD HDD operation. WD’s current CEO, David Goeckeler, and Kioxia CEO Nobuo Hayasaka would both need status-worthy roles after their businesses were combined.
Long-term, the SSD business probably has a higher growth prospect than HDDs so Goeckeler might prefer being involved with that. There will surely be a lot of senior exec brain time dedicated to this topic at WD and Kioxia, and what it means for career paths.
Apart from populating the exec offices, a combined business would surely require regulatory approval as it would decrease competition. And that brings up the issue of China’s regulatory authority, which might, in the circumstances of current US-China relations, not play nice. One possibility, maybe distant, is that the new Kioxia/WD business simply ignores the Chinese regulator but that would mean no sales into China.
The merged WD and Koixia entities will be viewed by management as having potential for cost savings, with duplicated business functions likely scrapped. Wells Fargo analyst Aaron Rakers lists significant combined synergies – end market/product roadmap, overlapping R&D (controller/system development), separate assembly and test operations, operating committee/decision, go-to-market/sales consolidation etc.
Outside the 50:50 split of their JV NAND foundry chip, Kioxia actually has its own additional NAND supply from a fab, amounting to 20 percent of its JV output share, and a combined company would inherit this.
Kioxia has a complicated ownership structure, with a Bain Capital consortium owning 56.2 percent, Toshiba Corporation having 40.3 percent, and Hoya Corporation 3.1 percent. Any acceptable Kioxia-WD combination would have to deliver perceived value to these three parties. The Bain consortium was composed of Bain, SK Hynix, Apple, Dell Technologies, Seagate Technology and Kingston Technology. It paid $18 billion for its share of the Toshiba Memory business in June 2018, which became Kioxia.
Kioxia tried to run an IPO in 2020-2021 with a valuation of $20.1 billion. The IPO attempt failed in 2022.
A driver for the IPO was that Toshiba needed to raise cash because it had its own financial problems, originally due to issues with its Westinghouse Electric nuclear power station business in 2017. These led to a potential bankruptcy and the selling off of Toshiba Memory in the first place.
Toshiba was even considering selling itself in April last year as a way of paying off debts and liabilities and becoming a freshly capitalized business. The net:net here is that it really does need the cash from a Kioxia-WD merger and as much cash as it can get.
The new SSD business will start life with an enviable third of the SSD market, roughly equal give or take a few points to Samsung’s market share. TrendForce revenue market share numbers for the third 2022 quarter were:
- Samsung: 33 percent
- Kioxia: 20.6 percent
- SK hynix + Solidigm: 18.5 percent
- Western Digital: 12.6 percent
- Micron: 12.3 percent
- Others: 4.6 percent
Kioxia + WD would equal 33.2 percent. Rakers estimates market section capacity shipment shares for the merged entity as:
- Enterprise SSDs: ~15 percent versus Samsung (~50 percent), Hynix (~25 percent), and Micron (~8 percent).
- Client SSDs: WD + Kioxia at ~29 percent vs Samsung (~28 percent), Hynix (~16 percent), and MU (~11 percent).
There is obvious scope to grow in the enterprise SSD market. Unlike the Sk hynix-Solidigm business, a combined Kioxia-WD NAND business will use a single technology stack and doesn’t have to worry about somehow integrating two stacks or otherwise moving to a single stack.
Who would finance such a merger? A combined company would involve WD splitting itself in two, meaning two stock market listings, unless the new Kioxia-WD was privately owned. We doubt that Elliott Management would agree to that deal unless it could see a way to unload the shares it would have in a reasonable time.
Also the share structure for current WD owners would need convoluted calculations. For example, if an investor owned one WD share now, how many shares would they get in the two resulting businesses? They could get one share in the WD HDD business and, say, only half a share in the WD/Kioxia combined business because WD currently has a 50:50 cut of the JV Fab’s output.
But Kioxia has additional NAND output from outside the JV’s Fabs so the value of that has to be taken into account, lessening the WD investor’s share in the new business, but increasing that of the Bain consortium and Toshiba itself.
For the investment experts involved in this deal, it will be a complicated process to emerge with an outcome that satisfies all the parties involved. In its favor are Toshiba’s need for cash and WD’s need to get Elliott off its back via realizing value from its Kioxia JV stake.
The NAND market is in a downturn, but that may only last for another two quarters or so, after which the underlying constant data storage increase should return it to growth. That would be a better backdrop for a public offering by a Kioxia-WD combination, with an interim private ownership deal led by, of course, Bain Capital.
This is just speculation, but discussions with a source close to Bain Capital showed that these they are realistic. They reminded me that there are several potential routes to liquidity for owners of stock in a merged business, if indeed a merger takes place at all.