The long-running and ongoing merger discussions between Bain Capital-owned Kioxia and its manufacturing joint-venture partner Western Digital’s NAND and SSD business is being reportedly upset by SK hynix’s concerns.
SK hynix is a partner in the Bain Capital consortium that took over Kioxia, then the Toshiba Memory business in 2018, paying $18 billion to do so. The other players in this high-stakes poker game are Toshiba, which owns 40.64 percent of Kioxia, and is about to be taken private, giving it a strong interest in selling its Kioxia stake for wads of cash, and activist investor Elliott Management.
Elliott Management already has its financial hooks into Western Digital, saying WD is undervalued because its component NAND/SSD business, unlike its disk drive business, is deprecated by investors. Set it free from the disk drive mother ship and investors would see just how good it was and value its shares, and Elliott’s holdings in them, much higher.
A combined Kioxia/Western Digital NAND business would have a 34 percent revenue share of the NAND market, according to TrendForce numbers from November 2022, more than current market leader Samsung’s 31 percent share. The merger makes market sense in this regard. The merged business would have its stock traded on Nasdaq and also pursue a Tokyo exchange listing.
What these players see is that, if Western Digital spun out its NAND/SSD business and that business was financed enough to buy into a merger with Kioxia, then many investors would get tasty morsels.
- Toshiba could get cash for its Kioxia stake – tick.
- Bain and its consortium members would get cash for their Kioxia stake – tick.
- Elliott would get cash for its stake in Western Digital’s spun off NAND/SSD business – tick.
- Western Digital would get Elliott Management off its back – tick.
As the long-running reports have progressed there have been leaks of details in the media, such as one in Bloomberg about financing the deal. It reported Kioxia was looking to refinance a ¥2 trillion ($14 billion) loan arrangement pursuant to the potential merger. Some of the loan funds would fund dividends for Kioxia shareholders. The deal was rumoured to compete this month.
Western Digital would own 50.1 percent of the merged operation, which would be headquartered in Japan and registered in the USA, and Kioxia the remaining 49.9 percent. Kioxia’s President Nobuo Hayasaka would be president of the merged business and most of the board members would be from Kioxia.
As a side point we would say this means Western Digital’s CEO, David Goeckeler may not have an executive operational role in the merged entity. That would mean playing second string to Kioxia’s Hayasaka, which would surely be unattractive. So Goeckeler will likely be staying with the WD hard disk drive business.
Now, reports in the FT and Nikkei say that SK hynix is worried the merged entity would not be strong enough to compete with Samsung.
The Nikkei points out that SK hynix is currently number 2 in the NAND market, behind Samsung and ahead of Kioxia and Western Digital. It would drop to number 3 if the merger goes ahead.
Comment
We think there is something else going on here. SK hynix could want to merge with or buy Kioxia itself, adding it alongside its Solidigm unit, bought for $9 billion from Intel in January 2022. But it would need to deconstruct the Kioxia-WD manufacturing JV or take it over and persuade WD to continue the arrangement.
SK hynix+Solidigm+Kioxia would have 40 percent of the global NAND market, leaving Samsung with 31 percent and Western Digital with 13 percent. That would look good from Sk hynix headquarters but not unlock the rivers of cash coming to Elliott Management from a Kioxia-Western Digital deal and leave Western Digital in a difficult situation. We can’t see Goeckeler agreeing to that.
It’s hard not to think that the Bain people have been traversing this ground over and over again with its consortium members and everyone else involved; getting all the ducks lined up in a row. Now, at a last minute stage, SK hynix steps out of line and starts quacking. Does it just want more cash for its holding? Is there a new view of the deal emerging in its boardroom? What on earth does it really and realistically want?
None of the participants in this corporate dance responded to requests for comment. It’s big business poker; you keep your hands hidden and present a poker face to the public watchers.
