Western Digital Corp.’s blockbuster takeover of SanDisk Corp. has been marked by one big turn after another, reminiscent of the turbulent industry the two companies lead.
Shareholders of the Irvine-based storage products maker this week are expected to approve the $17 billion acquisition, which has drawn attention from various corners of the financial and regulatory worlds.
The transaction has been unanimously approved by WD’s board and backed by influential independent proxy advisory firm Institutional Shareholder Services, which cited several strategic benefits in a recent letter to clients. Among the pluses: complementary product lines; a doubling of the potential sales market; moving the company beyond its core-but-declining hard disk drive business; a profit boost within 12 months of closing; and cost savings of $1.1 billion.
The SanDisk acquisition would create one of the most diversified storage product makers in the world, with combined revenue of about $19.7 billion.
The deal would more than double WD’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.
Milpitas-based SanDisk also manufactures hard drives, a segment WD has led for years. Its memory card products are carried in Best Buy, Walmart, Fry’s Electronics, and big online retailers, such as Amazon and Newegg.
The nod from Institutional Shareholder Services came a day after Beijing-based investor Unisplendour Corp. Ltd. terminated a $3.8 billion investment in WD amid a federal inquiry. The termination triggered a change to the original transaction, which valued SanDisk at $86.50 a share when the deal was announced Oct. 21.
The latest terms of the cash, debt and stock deal values SanDisk at $78.50 per share based on WD’s closing share price on Feb. 22, which pushed down the overall price to about $17 billion.
WD’s share price has dipped about 29% since the deal was announced, while SanDisk shares have dropped roughly 3%.
Alken Asset Management in London, one of WD’s largest investors, plans to oppose the deal and called the SanDisk bid “simply too high,” in a Feb. 22 letter to the company’s board. The investment manager, which owns about 2.2% of WD, cited changes in SanDisk’s markets and business, as well as larger capital market factors.
CFIUS
Opposition to the deal dovetailed with the federal inquiry, which was launched by the Committee on Foreign Investment in the U.S., a panel of representatives from various federal agencies that has purview over acquisitions and mergers that involve U.S. businesses and raise national security concerns. The committee was established in 1975 by executive order in response to rising investments in the U.S. by entities in the Middle East at a time when rising oil prices were unsettling the economy here and around the globe.
The committee, which seldom launches an investigation, cited the Exon-Florio Amendment to the Defense Production Act in its inquiry on the Unisplendour transaction, which would have given the company a 15% stake in WD.
The amendment grants the White House broad authority to review and block foreign direct investments that threaten U.S. “national security” or result in control of “any critical infrastructure” within the U.S. by any foreign entity.
The president could order a forced divestiture or other “unwinding” of any such transaction.
Information filed with CFIUS is not disclosed to the public under current law, according to the Treasury Department.
“Accordingly, the department does not comment on information relating to specific CFIUS cases, including whether or not certain parties have filed notices for review,” a spokesperson told the Business Journal.
The federal agency and WD declined to disclose what prompted the investigation into the Unisplendour investment. The proposed deal carried several provisions that limited Unisplendour’s insight into company operations and board rights, including restrictions on participating in government contract discussions and other “sensitive matters,” such as intellectual property—a growing concern of U.S. businesses and the U.S. government regarding China.
“We cannot comment on CFIUS’s decision-making process,” WD spokesman Steve Shattuck told the Business Journal.
Some company watchers have speculated that federal involvement ratcheted up amid China’s growing interest in U.S. tech companies, and as a response to China’s Ministry of Commerce holding up WD’s integration of its $4.8 billion buy of San Jose-based HGST Inc. for more than three years, ostensibly to consider antitrust concerns.
“That’s obviously a huge issue,” said Jayson Noland, senior analyst in the San Francisco office of Milwaukee-based Robert W. Baird & Co., “when you figure in not just storage of IP in the cloud but China and Japan-U.S. relationships.”
Chinese regulators finally gave the HGST deal the nod in October with stipulations: Western Digital had to offer both the HGST and WD brands of products in China and maintain separate sales teams for another two years.
The approval came less than a month after Unisplendour struck the deal to invest in WD. That was followed by a joint venture announced in November that provided WD inroads to capitalize on Unisplendour’s deep connections with the Chinese government.
Unisplendour, meanwhile, stood to gain a link to WD’s storage products, including unmatched developments in the burgeoning line of helium-based drives.
Unisplendour is one of China’s largest IT providers and electronics manufacturers. Its largest shareholder, Tsinghua University, is considered the Massachusetts Institute of Technology of China. Chinese President Xi Jinping is among its alumni.
The joint venture, based in China, was expected to be up and running this month.
Unisplendour has strengthened U.S. ties in the last few years in deals with tech blue chippers Intel Corp. and Hewlett-Packard. The company in May announced it would pay $2.3 billion to acquire a 51% stake in HP’s H3C business, which primarily sells networking equipment in China.
The world’s largest chipmaker, Santa Clara-based Intel Corp., in 2014 purchased a 20% stake in Unisplendour for $1.5 billion.
