Western Digital To Acquire SanDisk For $19 B

  • Western Digital will acquire SanDisk for $19 billion.
  • The acquisition will make Western Digital the most integrated storage products manufacturer.
  • Other storage manufactures such as Seagate Technology and Micron might soon join the ray of memory consolidations.

Leading HDD manufacturer Western Digital (NASDAQ:WDC) has agreed to acquire NAND manufacturer SanDisk (NASDAQ:SNDK) for $19 billion in cash and stock. The $86.50/share offer represents a 15% premium to SanDisk’s closing price (Oct 20) and ends weeks of speculation that Micron Micron (NASDAQ:MU) could be interested in buying out SanDisk.

When Western Digital agreed to sell a 15% stake of itself to China’s Unis, I pointed out that Western Digital was most likely trying to raise some cash to finance the acquisition of a flash memory manufacturer. But I did not foresee WDC going after a company the size of SanDisk. SanDisk sports a market cap of $15 billion compared to Western Digital’s $22 billion. The deal will be heavily leveraged since Western Digital has already secured an $18.4 billion loan. That loan combined with the $3.8 billion that Western Digital will receive from Unis will finance the SanDisk acquisition and the balance will be used to retire some of Western Digital’s and SanDisk’s debt.

Implications for Western Digital

Western Digital has, over the years, been making a series of small flash memory acquisitions but nothing near the size of SanDisk. Seagate Technology (NASDAQ:STX), Western Digital’s chief rival, recently announced a $690 million acquisition of Dot Hill, a hybrid flash manufacturer. The two companies usually follow on each other’s flash acquisitions by making their own shortly after so it was expected that Western Digital would make a move in that direction. Few people, however, would have imagined that Western Digital had a big shark on its mind this time round.

By buying SanDisk, Western Digital will become the only company that can sell both high end NAND SSDs and low end HDDs. WDC currently depends on 3rd-party NAND suppliers who also compete with the company in the SSD market. The SanDisk acquisition will make Western Digital the most vertically integrated memory maker that can address the entire market. While SanDisk’s 3D NAND is not considered as cutting edge as Micron’s, there are currently not many options in the market and existing players enjoy considerable pricing power. Meanwhile, Samsung is limited to mostly making high-end NAND most of which it uses in its own smartphones.

Selling NAND memory products will not only help Western Digital enjoy better margins, but will cement its lead over rival Seagate Technology. WDC has pre-announced FQ1 revenue of $3.4 billion and EPS of $1.56, better than consensus of $3.2 billion revenue and EPS of $1.56. More importantly, RBC have said that Western Digital stole enterprise market share from Seagate Technology. Seagate Technology has traditionally been a stronger enterprise storage player than WDC, but Western Digital has lately been closing the gap. Enterprise storage products sport a much higher ASP in the $100+/unit range compared to the $55-$65/unit range for PC/gaming units. Seagate has pre-announced that it expects FQ1 revenue of $2.9 billion, compared to an earlier guidance of $2.9 billion-$3.1 billion and lower than consensus estimate of $3.03 billion.

The deal may place some pressure on Seagate to acquire a company like Micron. Although Micron already has a 3D NAND partnership with Intel (NASDAQ:INTC), their 3D XPoint product will take time before it can become a real revenue driver for either company. Micron received 32% of its August quarter revenue from flash, and 60% from DRAM. Given the ongoing DRAM woes, Micron can either try to acquire a smaller flash manufacturer to strengthen its flash portfolio or be open to getting acquired itself.

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