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WD Stake Pushes OC-China Ties to New Level

China continued to make waves in Orange County last week with a $3.8 billion deal that will give Unisplendour Corp. Ltd. a 15% stake in Irvine-based Western Digital Corp.

Beijing-based Unisplendour, an IT provider and electronics manufacturer, paid a premium for its chunk of the world’s largest disk drive maker. It bought a newly issued block of stock for $92.50 a share, about 34% higher than WD’s share price on Sept. 29, the day before the deal was announced.

Shares finished last week at about $78 for a market capitalization of about $18 billion.

The Unisplendour investment is the third deal—and by far the biggest—between OC-based companies and counterparts in China in recent months.

Fountain Valley-based Kingston Technology Co. in early June sold subsidiary Payton Shenzhen Co. for $110.7 million to Shenzhen Kaifa Technology Co. Ltd. Kingston is the world’s largest memory products maker for computers and consumer electronics, with estimated annual revenue of $5.9 billion last year.

Last month, Fuzhou, China-based Fujian Thai Hot Investment Co. paid $102.5 million to acquire 51.5% of common stock of Alliance HealthCare Services Inc., a diagnostic imaging and radiation therapy provider in Newport Beach. The transaction is expected to close by the end of the year.

A much bigger deal with Chinese ties is in the works in Irvine, where chipmaker Broadcom Corp. has agreed to a $37 billion sale to Avago Technologies Ltd. in Singapore, the influential island nation with a population that’s about three-quarters ethnic Chinese. The deal is expected to close by early next year, creating the third-largest chipmaker in the world with combined annual revenue of about $15 billion.

The Western Digital news caught analysts and investors off guard on Wall Street and the Shenzhen Stock Exchange, where Unisplendour has traded since 1999.

“I didn’t see it coming,” said Jayson Noland, senior analyst in the San Francisco office of Milwaukee-based Robert W. Baird & Co. “I guess in hindsight maybe we should have been considering it more given some of the things that have happened recently.”

China, despite its manufacturing power, is still trying to develop a viable and diverse technology industry. U.S. tech companies, on the other hand, are aiming to strengthen political and business relationships in the world’s largest consumer market.

Unisplendour has played a key role in linking the U.S. and China.

The company in May announced it would pay $2.3 billion to acquire a 51% stake in Hewlett-Packard’s H3C business, which primarily sells networking equipment in China. Palo Alto-based HP is the world’s second-largest PC maker behind Lenovo in Beijing.

The world’s largest chipmaker, Santa Clara-based Intel Corp., about a year ago purchased a 20% stake in Unisplendour for $1.5 billion.

WD said it plans to use proceeds from the deal with Unisplendour to strengthen its balance sheet, provide financial flexibility and pursue long-term strategic growth initiatives in the U.S. and abroad.

Unisplendour will nominate one new director to Western Digital’s board and retain the seat as long as it owns at least 10% of the company. Its director will have limited rights and is being viewed more as a “board observer” who will be restricted from participating in discussions that involve government contracts and other “sensitive matters,” such as intellectual property, a growing concern of U.S. businesses and the U.S. government in China.

The sale also comes as Western Digital awaits approval from Chinese regulators to integrate its $4.8 billion buy in 2012 of HGST, a subsidiary of Japan-based Hitachi Ltd. The San Jose-based unit, which targets corporate customers with higher-margin storage products, employs 41,000 worldwide, including 12,000 in China.

Western Digital has had to hold off on fully integrating the two units—which holds the potential for several hundred million dollars in annual savings—while awaiting a final decision.

Western Digital last week didn’t address the ongoing regulatory hurdles in China publicly or with analysts.

Chief Executive Steve Milligan said in a June quarter earnings report said the company has made “meaningful progress” and would be “disappointed” if a resolution wasn’t reached by the end of the year.

Noland said the latest investment could help negotiations between WD and China’s Ministry of Commerce, but stopped short of a rubber stamp.

“It’s hard to know if this gets them across the finish line,” he said.

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