Western Digital Pitch for New Kioxia Agreement Faces Familiar Hurdles

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(Bloomberg) – Western Digital Corp. presents a new proposed acquisition of Kioxia Holdings Corp. four years after losing a takeover bid for the old Toshiba Corp. chip unit. But the American company’s offer comes up against familiar hurdles.

Among the challenges, Kioxia’s senior management would rather go public, Japanese government officials fear losing control of a chipmaker, and Chinese regulators are likely to block a U.S. takeover, people familiar with the matter say. Kioxia plans to file its initial public offering as early as next month to capitalize on strong investor demand for the chip shares, one of the people said, asking not to be named as the matter is private.

Western Digital and its bankers have been aggressive in offering a deal, offering a hefty price tag and describing it as a merger, the people said. Bain Capital, which controls Kioxia with Toshiba, is open to a combination, one person said.

Political opposition can be the biggest obstacle. The Japanese government has always protected its high-tech companies and the powerful Ministry of Economy, Trade and Industry helped decide the auction war four years ago when Toshiba sold a controlling stake in the chip unit to the consortium led by Bain.

One METI faction is ready to discuss a deal with Western Digital, but another faction opposes a sale, one person said. The Japanese government has plans to invest billions of dollars in promoting the domestic semiconductor industry, so losing control of its largest chipmaker would appear to conflict with that goal.

METI has not decided whether or not to approve the agreement. Prime Minister Yoshihide Suga and Akira Amari, the politician who champions local semiconductor investments, will likely make the final decision, one person said.

China is a bigger obstacle. Beijing is increasingly reluctant to approve acquisitions by US companies as tensions with the US government increase. Chinese regulators have yet to approve the proposed acquisition by Nvidia Corp. from Arm Ltd. of SoftBank Group Corp.

China’s approval of a Kioxia sale could also prove problematic. If the memory chipmaker were to fall into the hands of an American company, it would be directly subject to any restrictions on sales determined by President Joe Biden’s administration. Kioxia management is at risk of being involved in a merger deal that China could consider for a year or two and then reject.

“The deal has no merit for Kioxia,” said Akira Minamikawa, analyst at Omdia.

He pointed out that Kioxia and Western Digital are already cooperating on the production of NAND flash memory. The American company would likely use its control to tip the scales towards memory chips for personal computers, rather than smartphones as Kioxia has preferred.

“By purchasing Kioxia, Western Digital wants to change the production allocation for the greater benefit of the American company,” he said.

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The deal is already a financial stretch for Western Digital. The proposed acquisition, which would be cash and stock, would value the target at more than $ 20 billion, one person said. Western Digital’s market value is just below this level.

Some factors have changed in favor of a deal since Western Digital failed on its offer four years ago. CEO Steve Milligan, who led the charge at the time and infuriated senior Toshiba executives, stepped down last year. Yasuo Naruke, the former CEO of Toshiba Memory who fought hard against the takeover, died last year.

Relations between the two companies are less bitter, but not warm. Milligan’s replacement is David Goeckeler, who has been presented as the likely candidate to lead the combined company.

But Kioxia has yet to agree on who will take the CEO role or which senior executives will lead the management, one person said. The structure has also not been determined.

Japanese financial institutions, which would likely be needed to fund a deal, have not yet been involved, the person said. Funding will need to be worked out once the structure of the agreement is finalized.

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