Credit: Shutterstock photoThe proposed merger between Western Digital Corporation WDC and SanDisk Corporation SNDK moved a step forward after more than 90% of shareholders of both the companies voted in favor of the deal yesterday. The transaction is expected to be completed during the second quarter of 2016.
Western Digital and SanDisk entered into a definitive agreement on Oct 21, 2015, under which the former will acquire the latter. (Read: Where Stands the Digital Storage Stand-Alone? )
What Western Digital Gains from the Deal
SanDisk is the largest supplier of NAND flash storage cards for data storage in a compact removable format. These are used in digital cameras, multimedia cellular phones, USB flash drives, gaming devices, laptop computers, personal computers, audio players and video players.
On the contrary, Western Digital derives the bulk of its revenues from the sale of hard-disk drives (HDDs), mainly used by PC manufacturers. The company is the largest U.S. manufacturer of HDDs with 44% market share, closely followed by Seagate Technologies' STX 40%. However, the persistent decline in PC sales has been hurting Western Digital's HDD shipments over the past several quarters, which in turn dented revenues.
Therefore, the world's leading HDD manufacturer is trying to lower its dependency on PC storage and focus on the rapidly growing flash and cloud storage businesses to boost its top line.
The acquisition of SanDisk will open newer growth avenues for Western Digital and help in capturing market traction in the newer storage technology, Solid State Drive (SSD) segment. The merger will lead to economies of scale, lower costs, increase market reach and improve product breadth, among other things. The company will also be able to offer competitive solutions in cloud-based computing, which has taken the digital storage solution space by storm over the past couple of years.
It is to be noted that Western Digital expects cost synergies of $500 million within the first 18 months post the deal closure. Moreover, the acquisition is anticipated to be accretive to the company's earnings in the very first year.
The deal has got regulatory approvals in the U.S., EU, Singapore, Japan, Taiwan, South Korea, Turkey and South Africa. However, the transaction is still subject to other closing conditions, including regulatory approval in China.
The Ups and Downs
The deal has not been a smooth one for Western Digital.
Western Digital decided to go for the aforementioned acquisition after it received a $3.775 billion equity investment commitment last September from the Chinese government-backed Tsinghua Unigroup's asset management arm, Unisplendour Corporation Limited (Unis). (Read: Tsinghua Buys Western Digital Stake: What it Means for You? )
However, on Feb 22, Tsinghua backed out of the plan after the secretive Committee on Foreign Investment in the U.S. (CFIUS) decided to investigate the transaction. The scrutiny resulted from intense pressure from U.S. politicians who were concerned about putting domestic businesses in the hands of Chinese government officials.
Following this, Western Digital and SanDisk made a few changes to the deal price on Feb 23. Per the new agreement, Western Digital will now pay $78.50 in cash and 0.24 in stock for every SanDisk share, totaling $15.78 billion. Earlier, Western Digital had agreed to pay $86.50 per share for all the outstanding shares of SanDisk translating to a total of $19 billion.
Furthermore, according to Bloomberg, Western Digital asked lenders last week for an $18 billion leveraged loan to finance the buyout (read : Western Digital Seeking Lenders for $18 Billion Loan ). According to the regulatory documents filed last week, Western Digital would receive the total amount in three parts - $9 billion in term loan, $8.1 billion in bridge loan and $1 billion in continuous credit facility.
Conclusion
We believe that this acquisition offers a smart exit to SanDisk's shareholders and will make Western Digital the world's largest flash storage solution provider. Moreover, strategic acquisitions to expand its offerings in the SSD segment are expected to place Western Digital in a better position than peers like Seagate Technologies.
However, it all depends on how early Western Digital integrates SanDisk's business.
Currently, Western Digital has a Zacks Rank #3 (Hold). A better-ranked stock in the technology sector is Qumu Corporation QUMU sporting a Zacks Rank #1 (Strong Buy).
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WESTERN DIGITAL (WDC): Free Stock Analysis Report
SEAGATE TECH (STX): Free Stock Analysis Report
QUMU CORP (QUMU): Free Stock Analysis Report
SANDISK CORP (SNDK): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
