What a wild ride for Irvine-based storage products maker Western Digital Corp. last week.
The company in less than three business days received long-awaited approval to integrate its $4.8 billion buy of HGST Inc. that closed more than three years ago, then announced a blockbuster $19 billion cash-and-stock deal to acquire Milpitas-based flash memory maker SanDisk Corp.
The transaction, which represents a 15% premium on SanDisk’s shares before the acquisition was announced Oct. 21, creates one of the most diversified storage product makers in the world, with combined revenue of about $19.7 billion.
“We believe the transaction has multiple long-term strategic benefits,” Western Digital Chief Executive Steve Milligan said in a conference call with analysts after the announcement. “The combined company will target an entire spectrum of customers, [original equipment makers] enterprise, hyperscale and retail, as well as in products, desktops, notebooks, smartphones, cameras, tablets, connected devices, data centers and servers.”
The deal more than doubles Western Digital’s market opportunities to $76 billion while boosting higher-margin business lines in solid-state drives and the booming data analytics, digital video, cloud computing and data center storage segments. SanDisk also manufactures hard drives, a segment Western Digital has led for years.
“Between 2013 and 2020, we’re expecting to see about 10 times growth in data,” Milligan said. “Workloads are increasingly transitioning to big data-centric analysis, requiring massive amounts of storage and computing power. The accelerating trend of mobility and consumerization of IT is allowing us to establish direct relationships with data users.”
The deal perhaps just as importantly shores up a volatile supply chain of NAND flash memory, securing long-term access to solid-state components at a lower cost.
Solid-state drives, which use chips instead of spinning disks to store and retrieve data, are becoming more popular in consumer products and hold mass appeal with large corporate customers with greater data needs and demands.
NAND flash is the most popular rewritable memory chip used in USB drives, cameras, iPods, smartphones, tablets and other devices.
SanDisk’s memory card products are carried in Best Buy, Walmart, Fry’s Electronics and big online retailers, such as Amazon and Newegg.Â
SanDisk’s 15-year joint partnership with Toshiba Corp. to operate memory flash plants in Japan will continue under the deal, which the Tokyo-based electronics giant had to sign off on.
Projections, HQ
Western Digital projects annual savings of $500 million in synergies and cost-cutting measures within 18 months of closing the purchase. The transaction is projected to boost earnings within 12 months of closing; the company didn’t provide profit targets.
Western Digital said it will maintain headquarters in Irvine, where it employs about 1,700.
The combined entity will have 15,000 issued and pending patents and $2.3 billion in research and development spending, roughly 12% of total revenues.
SanDisk employed nearly 8,700 at the end of last year, according its annual report.
Western Digital will finance the purchase of all outstanding SanDisk stock through a mix of cash, new debt and its own stock. It said it expects to add $18.4 billion in debt, including $1 billion in revolving credit, and will use new debt to fund part of the purchase, refinance existing debt of both companies, and pay related transaction fees and expenses. The funding mix could be adjusted if SanDisk’s cash balance falls below certain benchmarks at close.
The transaction, expected to close in the third quarter of next year, was approved by the boards of both companies but still needs a nod from SanDisk shareholders.
The deal isn’t expected to run into much trouble along the way, unlike Western Digital’s buy of HGST, which was wrought with provisions, concessions and approvals around the world stemming from antitrust concerns.
The final nod to integrate the San Jose-based unit came last week from China’s Ministry of Commerce, which had held up combining the companies for more than three years due to concerns over pricing of products in its consumer market as it exerted its influence on the international stage.
“It’s a huge deal for the industry,” said Jayson Noland, senior analyst in the San Francisco office of Milwaukee-based Robert W. Baird & Co.
Western Digital projects it will save about $400 million annually, with additional “significant” savings on goods sold by integrating HGST’s production capabilities and about 41,000 employees into its work force of about 76,000. It will take 12 to 24 months to realize the gains.
Both companies have operations and manufacturing plants around the world, so big job cuts and facility closures are likely.
China’s approval came with stipulations: Western Digital has to offer HGST and WD product brands and maintain separate sales teams for two years.
The company also had to make concessions to the Federal Trade Commission, which granted approval about two months after the transaction closed in March 2012.
The company had to sell its business of 3.5-inch hard disk drives, which were acquired by Toshiba. The divestiture also included the transfer or licensing of intellectual property rights, the transfer of personnel, and supplying Toshiba certain disk drive components.
Toshiba Storage
Western Digital as part of the deal acquired Toshiba Storage Device Co. in Thailand, which had shuttered its operation for months at the time of the agreement after a typhoon and monsoons swept over the region, killing more than 300 people and flooding about 14,000 factories.
Thailand at the time was the world’s second largest producer of disk drives behind China and is still a major supplier of hard drive components.Â
Financial terms of the Toshiba deals weren’t disclosed.
It took Western Digital exactly a year to finalize the HGST deal.
HGST specializes in higher-margin corporate storage drives and has made big gains in the growing cloud, server and solid-state drive segments. Its San Jose operation—an important growth driver for Western Digital over the past few years and one that’s scheduled for a major expansion—is one of the last legacy manufacturing hubs in Silicon Valley. It was established in 1956 and is considered the birthplace of hard drive development.
The first storage unit was introduced there in 1964 and featured a removable disk, a revolutionary technology that eventually ended the era of punched cards.
The integration will begin immediately and take about two years.
Western Digital has established a dedicated Integration Management Office team to handle the particulars that’s comprised of representatives across various areas and functions at Western Digital and HGST.
Exec Changes
SanDisk co-founder and Chief Executive Sanjay Mehrotra will join Western Digital’s board, the company said.
Western Digital initiated several executive changes last week related to the integration:
• Mike Cordano, former HGST president, was appointed president and chief operating officer of Western Digital.
• Jim Murphy, who previously served as president of the WD subsidiary, will lead the Storage Devices business unit, which includes hard disk and solid-state drive products.
• HGST Content Solutions and sales executive Jim Welsh and Senior Vice President Dave Tang will lead the company’s Content Solutions and Storage Solutions business units, respectively.
• Milligan will continue to oversee business and corporate functions, including an Advanced Technology group led by Steve Campbell, former HGST chief technology officer.
Unisplendour
Some insiders felt the long-awaited approval by Chinese regulators was imminent after Beijing-based Unisplendour Corp. paid $3.8 billion for a minority stake in Western Digital less than a month ago.
It paid a big premium for its 15% stake in the world’s largest disk drive maker, about 34% higher than Western Digital’s share price before the announcement.
The IT provider and electronics manufacturer, which has strengthened U.S. ties in the past year in deals with tech blue chippers Intel and Hewlett-Packard, is deeply connected to the Chinese government. Its largest shareholder is Tsinghua University in Beijing, considered the Massachusetts Institute of Technology of China, with such notable alums as Xi Jinping, the president of the world’s most populous country.
“When they got the investment from [Unisplendour], there was an assumption made by some investors that the [Ministry of Commerce] deal was a foregone conclusion,” said Robert W. Baird & Co.’s Noland, who recently met with Western Digital’s largest shareholders.
