Kingston Technology Inc. has quietly joined forces with a consortium of global giants aiming to buy Toshiba Corp.’s flash memory business for $18 billion.
The Fountain Valley-based company aligned with Apple Inc. in Cupertino, Boston-based Bain Capital, South Korean chipmaker SK Hynix Inc., Dell Inc. in Round Rock, Texas, and Western Digital Corp. rival Seagate Technology PLC, which is incorporated in Ireland with its U.S. base in Cupertino.
The sale—one of the biggest storylines playing out in the tech sector—was approved by Toshiba’s board last week but still faces regulatory hurdles and legal challenges by Western Digital, a joint partner in Toshiba’s flash memory business for more than a decade.
The transaction could have deep ramifications in Orange County, where Kingston, Toshiba and Western Digital have major operations.
Kingston is the world’s largest memory products maker for computers and consumer electronics, with estimated sales last year of $6.6 billion. The buy would help Kingston shore up supply of NAND flash for years. The key memory component is the most popular rewritable memory chip used in USB drives, cameras, iPods, smartphones, tablets and other devices.
Kingston generates a sizable portion of its sales through USB cards and solid-state drives, which also utilize NAND flash.
“We cannot comment on the possible sale of the Toshiba flash-chip unit,” Kingston spokesperson David Leong told the Business Journal.
OC’s largest minority-owned company, established in 1987 by John Tu and David Sun, employs about 650 here and 3,000 globally, including at a major hub in Taiwan.
Strategy
The deal, which would provide a lucrative payout for Western Digital, would also deliver a strategic blow to the company. It battled Seagate for years as the top global seller of hard disk drives, but overtook the company for good a few years ago while it diversified into solid-state and hybrid drives, now its biggest growth drivers.
Western Digital moved aggressively into the higher-margin SSD business with three buys in 2013, including a $340 million takeover of Santa Ana-based STEC Inc., and has made several more strategic investments in the segment since.
Seagate didn’t follow the path to diversification much beyond HDDs, a maturing segment that uses spinning disks to store and transfer data. The company’s sales have dropped three straight years. Its shares have fallen 15% since January to a market value of about $9.3 billion.
Western Digital shares are up 25% since January, and the firm now has a market cap of $25.4 billion.
But it lost the battle for Toshiba’s 51% stake in their joint venture while contending that Toshiba violated terms of the venture in agreeing to sell its flash memory business without the consent of Western Digital subsidiary, Milpitas-based SanDisk Corp., which Western Digital acquired last year for $17 billion.
SanDisk’s arbitration request, filed in May for injunctive relief, is working its way through the International Court of Arbitration of the International Chamber of Commerce in San Francisco.
“We are disappointed that Toshiba would take this action despite Western Digital’s tireless efforts to reach a resolution that is in the best interests of all stakeholders,” the company said in a statement. “It is troubling that Toshiba would pursue this transaction without SanDisk’s consent, as the language in the relevant JV agreements is unambiguous, and courts have entered multiple rulings in favor of protecting SanDisk’s contractual rights.”
A majority of Western Digital’s NAND-flash memory is primarily supplied through its three business ventures with Toshiba, according to its annual report.
Western Digital, which recently moved its headquarters from Irvine to San Jose, has an estimated 1,700 local employees, putting it at No. 50 on the Business Journal’s annual list of the largest employers here.
Its former headquarters at Park Place in Irvine will remain a key operational hub, the company told the Business Journal in April, though it didn’t respond when asked if the headquarters shift would affect those operations, including employment.
The company has slashed hundreds of local jobs in the last few years.
Its 467,000-square-foot office houses research and development labs and administrative, marketing and sales departments, according to its annual report. Western Digital’s enterprise solid-state drive division and other select teams from its client devices business were scheduled to relocate to Irvine in an ongoing restructuring effort that the company said wasn’t related to the headquarters change.
Toshiba’s Slide
The sale could save Toshiba from financial ruin as it attempts to climb out of a $4.5 billion hole created by its bankrupt U.S. nuclear business. The charge-offs, reporting delays, and credit downgrades threaten its listing on the Tokyo Stock Exchange, where it has traded since the exchange was established in 1949.
The Tokyo-based company is also reeling from an accounting scandal in late 2015 in which senior management overstated profits by about $1.2 billion over a seven-year period. The fallout tarnished the brand and led to the resignation of Chief Executive Hisao Tanaka, Vice Chairman Norio Sasaki, and eight board members.
Toshiba’s slide has led to a reduced local presence for a company with a deep legacy here that helped shape the county’s tech contingent for decades.
The Business Journal reported in May that it planned to shutter its U.S. commercial phone service division based in Irvine in the second local business closure enacted by the conglomerate in a year.
Toshiba America Information Systems Inc.’s Telecommunication Systems Division employed about 150, putting it at No. 8 among the largest telecom employers with operations in OC, according to Business Journal research.
The cuts amounted to about 8.5% of Toshiba’s estimated 1,745-member employee base here. It entered the year as the third-biggest foreign-owned company in OC based on local employment.
The telecom division, established 30 years ago, provided IP, digital and cloud-based phone systems and services, and related support and maintenance.
The Business Journal reported last year that Toshiba’s U.S. electronics unit, also headquartered in Irvine, exited the consumer PC market in a major strategic shift that underscored the changing habits of end-users and the lingering challenges facing legacy manufacturers in Japan and elsewhere.
The move followed big job cuts at Toshiba America Information Systems, which cut 200 workers a few months earlier, or roughly 20% of its workforce. The unit primarily handles marketing and sales operations in the U.S. for its Tokyo parent.
It’s Toshiba’s largest local unit, with annual sales of about $3 billion, and sells business laptops; LCD and LED televisions; Blu-ray and DVD players; camcorders; imaging products for the security, medical and manufacturing markets; and storage products for the automotive, computer and consumer electronics sectors.
Toshiba’s global tumult played a role in the tech giant selling its 26-acre campus at 9740 Irvine Blvd. in the Irvine Spectrum in December as it prepped to move its medical device unit in Tustin to University Research Park next to the University of California-Irvine. That site was last used by Broadcom Ltd., which briefly entered the bidding war for Toshiba’s flash business but was ultimately turned away.
Other spurned suitors include Apple supplier Foxconn and private equity firm KKR & Co. LP.
Demand
The flash memory sale comes during a global supply crunch in NAND flash despite vast improvements in manufacturing processes, yields and scale over the last several years. Big NAND chipmakers, such as Samsung, SK Hynix, Intel Corp. and Micron Technology Inc., have exhausted the current standard of stacked 2-D wafer production and are in the midst of transitioning to 3-D wafer production to increase chip density.
Demand has been fueled by the proliferation of mobile devices and other electronics that has taxed base memory components as they consume more data. That has limited NAND supply to Kingston and others for more than a year.
Santa Clara-based Intel, the world’s largest chipmaker with $59.3 billion in revenue last year, and Micron Technology in Boise, Idaho, the world’s seventh largest with sales of nearly $12.4 billion, have a NAND flash joint venture that could end next year if Micron exercises a buyout clause.
