Chip mergers are more urgent and awkward in 2023



HONG KONG (Reuters Breakingviews) -Western Digital faces a daunting M&A challenge. The $11 billion outfit has revived talks with Japan's Kioxia after efforts for a $20 billion deal stalled in 2021, Bloomberg reported on Thursday. Price wars are plaguing sales of semiconductors storing data and consolidation can help as demand plunges. The duo will have to be creative to convince politicians fretting about chips wars.

    Both outfits specialise in a type of memory chip called NAND flash, which is used in smartphones, computers and data centre servers. The market is relatively fragmented compared to other semiconductors, with five major outfits competing. That makes industry consolidation appealing: a combined Western Digital-Kioxia would control roughly 30% of global sales, putting it roughly on par with leader Samsung Electronics, according to data from research firm TrendForce.

    A severe market downturn is adding urgency to a deal. As consumers and companies pare back on spending amid a looming global recession, annual revenue for NAND chips is expected to slump 14% this year to $60 billion, Gartner estimates. Western Digital, which already has a joint venture with Kioxia, is expected to see EBITDA fall by two-thirds, to $1.3 billion, in its fiscal year ending June, per analyst forecasts on Refinitiv.

    Yet even if the logic for a combination looks more compelling against this backdrop, the M&A hurdles Western Digital faced in 2021 are even more challenging today. Valuation will be a sticking point: reviving a mooted $20 billion all-stock merger looks unlikely, given the U.S. firm's share price has more than halved over the past two years.

    How governments react will be the bigger unknown. One reason negotiations stalled was due to uncertainty over securing approval from Tokyo, which sees Kioxia, previously known as Toshiba Memory, as a national and strategic champion; one official even told Reuters at the time that Japan "shouldn't allow everything to be taken away to the United States". That sentiment will have only increased today as Washington presses ahead with its twin campaigns of bringing semiconductor manufacturing back to the United States and hobbling China's chip ambitions. Indeed, any cross-border merger will also require anti-trust approvals in Beijing. The union between Western Digital and Kioxia will be a long slog, but worth it.

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U.S. memory chip maker Western Digital has restarted merger talks with its Japanese joint venture partner Kioxia, Bloomberg reported on Jan. 5, citing people familiar with the matter.

    A Kioxia spokesperson said the company does not comment on market rumours or speculation, while Western Digital said it doesn't speculate on M&A activity, Reuters reported.

    In 2021, negotiations for a $20 billion stock merger stalled over a series of issues including valuation discrepancies, uncertainty over securing approval from the Japanese government and an ongoing strategic review at Kioxia's 41% shareholder Toshiba, according to Reuters, citing sources.

    Shares of Western Digital rose 7.7% to $35.63 during after-hours trading in New York on Jan. 4.

(Editing by Antony Currie and Thomas Shum)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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