It’s raining money and mergers as the end of the year is approaching! The latest news coming in the highly volatile tech space indicate that Sandisk Corporation (NASDAQ:SNDK), one of the major players in the non-volatile memory space; is being acquired by Western Digital Corp (NASDAQ:WDC). The deal evaluated at nearly $14 billion is to be carried out through an exchange of both cash and stocks! So why did the largest manufacturer of hard drives feel the need to acquire a company whose claim to fame rests mainly on flash-based storage? Join us as we take a close look at the reasons behind the deal that makes Western Digital the broadest supplier of data-storage components and the impact it could have on the storage industry as a whole!
Mergers happen for a variety of different reasons. Consolidation of two similar portfolios can lead to lower costs, greater market reach through combined sales efforts and of course acquisition of new technology. The driving reason behind the Western Digital SanDisk merger was the necessity for Western Digital to diversify from the ageing hard drive business to the newer SSD storage market which has been showing strong growth potential. According to the research firm Gartner, worldwide revenues for SSD Storage market for 2015 will decline 6% YoY for an estimated revenue of around $30.9 billion. In contrast, the flash-based memory industry will see a surge of 9% YoY to end the year with revenues predicted to be around $31.3 billion. So why does this deal that makes perfect sense on paper have Western Digital stocks plummeting down 4.6% to $71.44?
Let’s Talk Money
Before we begin to explain the “why” behind the fall in share prices for Western Digital, let’s first look at the “what” that caused it in the first place. The details of the transaction are partly mired in confusion at the moment mainly due to the uncertainty of the deal between Western Digital and Unisplendour, which would see the Chinese state-backed company invest $3.78 billion for a 15% stake in the company.
Western Digital’s Hefty Offer
Western Digital has offered to pay $85.10 per share in cash a 15% premium over the market value of SanDisk as of the closing of markets on the 20th and 0.0176 shares of its stock for each SanDisk share should their deal with Unisplendour follow through. This will mean that the majority of the merger will involve a cash transaction following the cash injection from the Chinese investors.
The scenario, however, changes drastically if they cannot secure the funding. The price then will be $67.50 in cash and 0.2387 shares for each share of SanDisk Corp. As Joe Wittine, an analyst at Longbow Research, put it, faced with two choices for the takeover,
“They made the more aggressive play.”
It could, however, be more of a forced hand than raising the stakes as rival SeaGate had been looking to break into the consumer SSD space as well, and Western Digital couldn’t afford to slip this opportunity up!
What’s in it for SanDisk?
SanDisk currently occupies the second place in the consumer SSD market which has been dominated by Samsung till now. With a shift towards SSD from the standard Hard Drive, the SSD market is booming and to latch onto the growth spur, SanDisk needs the might of Western Digital and their impressive collection of over 10,000 patents. The merger provides them with the opportunity to break into server and data center storage a sphere where WD in recent years has held a fair bit of ground. They also get to target OEM, Enterprise, hyper scale and retail consumers all in one go! With the demand for flash storage based on EMMC for smartphones and tablets from SanDisk waning in the recent months, SanDisk’s crown in the mobile storage world is under threat. This seems as good a time as any to go through with the merger and explore new markets!
The Deal: Best for Both Companies
The combined synergies are expected to be to the tune of $500 million after merely 19 months of operation. In the highly competitive storage industry, vertical integration is key to providing products and services which can differentiate themselves both in terms of hardware as well as software. With this acquisition, Western Digital gets its hands on the third largest flash fabrication plant and can source flash chips internally at attractive prices. SanDisk has already announced that their deal with Toshiba will continue after the merger has taken place, and this ensures that Western Digital has the latest in 3D NAND technology ready to generate some impressive IP for shuttling data around data centers quickly.
Enterprise SSD solutions are one of Western Digital’s strong suits where they have a significant market share, and the combined companies will look to gain a majority in that segment and grab the number 2 spot after Intel.
With the future looking brighter than ever for flash storage, these two companies seemed to have galvanised the deal at the right time. However, while the prospects are indeed there, and the future shines bright, the present is a bit murky. Here are some of the pitfalls that might throw a jack into their plans of a quick integration and a profit making merger.
The Hurdles That Await
This has been the year of the mega mergers with the largest tech deal between Dell and EMC being finalised just a few days back at $67 billion. Much of the same issues that plague that deal can be seen making their way into this one as well albeit to a much lesser and possibly manageable extent! Here are few of the reasons that might have caused the fall in share prices that we alluded to before.
- The first big one in their path as a combined company is going to be the debt! They are going to end up almost $14 billion in debt after the merger completion and with none of them in industry leading positions in either one of their respective fields, it could be a long time before we see them even break even.
- SanDisk’s flash-based EMMC storage is mainly dependent on mobiles and tablets, primarily Apple in their iPhones and iPads. With Apple moving away from embedded flash to an NVME based drive on the latest iPhones might be a cause for concern.
- Toshiba and SanDisk have been behind on the tech front with 3D NAND technology and have thus lost a significant chunk of the market to rivals Samsung. SanDisk has also failed to establish themselves as a major player in the SSD controller space, relying more on third-party sourced controllers. They might have one of the most advanced NANDs on their hand, but every minute they wait to release it to the market is depleting the possible impact it can have on their market share!
Silver Lining in the Cloud
As we have seen with most of these mergers they seem to be showcasing a definite trend towards Cloud based storage. The future of computing does not include people storing their personal data on large platter drives. The hard drive is on its way to an inevitable extinction, and Western Digital realises that. The focus will now be on cloud storage and as more and more people store and access data from the cloud, the one thing they will be putting more strain on the data centers and storage servers. To keep up, the enterprise and their datacenters have to switch to SSDs, which are more reliable, not to mention multiples faster than traditional mechanical drives. This is Western Digital’s big chance and with SanDisk in tow they are ready to serve the big data requirements of the established Cloud Computing Giants and satiate their need for better and faster storage solutions.
Western Digital Chief Executive Officer Steve Milligan said in an interview.
“Scale matters. Having a broad set of resources matters.”
And we tend to agree on that. What is more interesting is how this will affect the storage industry and how rivals SeaGate will react. The fate of the smaller players in the industry is also worth looking out for as they will be under immense pressure to consolidate as well and may very well be snapped up by other larger companies in the coming months. $17 billion dollars cannot fully explain the impact of this deal as this very well may prove to be the catalyst that will usher in a change that changes the look of the entire storage industry. Exciting times ahead indeed, as going by our hunch, this isn’t the last of the large tech mergers that we will witness this year!