Western Digital, Kioxia Revive Merger Talks With Flash Memory Demand Sinking

(Bloomberg) — Western Digital Corp. has restarted talks with Japan’s Kioxia Holdings Corp. in a deal that could unite two technology storage providers, according to people familiar with the matter.

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While the structure of a potential deal remains fluid, the parties are discussing merging into one publicly traded company, said the people, who asked not to be identified because the talks are private. The current discussions, which revived late last year, are in the early stage and could also end without an agreement, the people said.

The companies, which have a joint venture that produces flash chips, have been circling each other for years.

Talks between the competitors that were reported in 2021 failed to yield what could have been a $20 billion transaction. Closely held Kioxia, which is backed by Bain Capital and Toshiba Corp., also considered pursuing an initial public offering in 2021, though Chief Executive Officer Nobuo Hayasaka said in October it had no immediate plans for an IPO.

Western Digital rose 5.2% to close at $33.05 in New York trading Wednesday, giving the company a market value of about $10.5 billion. The shares jumped more than 8% after the close of regular trading.

Representatives for Western Digital and Kioxia declined to comment.

Strategic Review

In June, Western Digital announced a review of strategic alternatives following discussions with activist investor Elliott Investment Management.

A deal between Western Digital and Kioxia would build on a sometimes fractious partnership.

Western Digital has provided Kioxia with funds for capital expenditure and research and development in return for production out of its Japanese partner’s plants. The relationship turned bitter when Western Digital, under a previous CEO, tried to acquire Kioxia when Toshiba was suffering financial difficulties as a result of its nuclear power division’s troubles.

The current talks come as a sense of crisis in the industry as demand falls may persuade stakeholders and regulators to overcome reservations that have derailed deals in the past.

Profit Plunge

Western Digital, based in San Jose, California, has seen its shares drop 51% in the past year, leaving it with a market value of about $10 billion. While its revenue for the quarter ended Sept. 30 fell to $3.7 billion from about $5.1 billion the previous year, its net income dived to $34 million from $636 million for the period.

Kioxia, which was spun out of Toshiba in 2018, is the last remaining Japanese chipmaker capable of producing semiconductors on leading production technology. Japan has seen its lead in that vital field taken by South Korea and Taiwan.

Demand for memory chips has plummeted along with the cool down in their main markets: computing and smartphones. Publicly traded competitors such as Micron Technology Inc. and SK Hynix Inc. are facing steep sales declines in 2023 and may end up reporting losses, according to analysts’ projections.

What Bloomberg Intelligence says:

“This would create a company with meaningful scale in NAND flash memory and could structurally improve the broad NAND market. The combined NAND revenue share would be 33%, rivaling market leader Samsung.”

— Woo Jin Ho, BI senior technology analyst

Click here to read the research.

Western Digital is also being hit by plunging demand for computer components and will lose money in 2023, according to estimates.

In this environment, companies will be under increasing pressure to join forces to better compete with Samsung Electronics Co. Samsung dominates the memory industry and has far greater resources to meet the skyrocketing cost of building leading-edge production facilities.

–With assistance from Gillian Tan and Takashi Hirokawa.

(Updates with share gain in fifth paragraph.)