WD to Potentially Split Flash and HDD Businesses

This is an Executive Brief of Trendfocus Inc.‘s Information Services.

Western Digital’s Board Announces Strategic Review Process to Potentially Split Flash and HDD Businesses

Following a Wall Street Journal article published late on June 7, 2022, Western Digital issued a press release announcing a “Review of Strategic Alternatives”, publicly stating that the executive committee of the company’s board, chaired by CEO David Goeckeler, plans to fully evaluate a range of alternatives for the company moving forward.

In addressing Elliott Investment Management’s previously released open letter to the board seeking to invest upwards of an additional $1 billion in a divested flash business, Western Digital announced a process to review a “broad range of strategic and financial alternatives“, including options for separating the flash and HDD businesses.

Back in 2020, under the current management, Western Digital re-organized internally into separate flash and HDD business units under a broader corporate umbrella that sought to leverage the 2 key storage technologies across a diverse customer base from retail products sold in the channel to massive hyperscale companies. Investors have long lamented the company’s languishing stock price, though, with market capitalization essentially no higher than just before it purchased SanDisk in 2016 and remaining roughly equivalent to its HDD-only competitor, Seagate (Seagate does purchase merchant NAND for its small portfolio of SSD products, however).

Quoting Elliott’s managing partner Jesse Cohn and senior portfolio manager Jason Genrich in Western Digital’s release, the 2 stated: “We’re encouraged by the positive direction of our discussions so far, and by Western Digital’s openness to considering a full separation of its flash business” and remained confident of the company’s efforts to unlock shareholder value. While Western Digital agreed to evaluate a broad range of alternatives for its businesses, by quoting Elliott, it is difficult to envision an outcomeother than Elliot’s goal to split the company.

A spin-off of flash would likely create a significant number of challenges in terms of how flash supply is managed across stand-alone flash and HDD companies as HDD products, storage sub-systems and retail products all now maintain flash and SSDs as key components alongside HDDs. Sales and customer support organizations which currently span across flash and HDDs would likely have to be split and replicated to support separate entities and the long-term goal of becoming a full portfolio storage device company would come to an end.

On the other hand, separate flash and HDD companies would invariably unlock another long-standing potential deal to merge Western Digital’s flash business with flash Ventures partner Kioxia. Volatile market conditions for flash have postponed Kioxia’s planned IPO for a number of years now and a merger with Western Digital in its current setup has been stymied by the latter’s weak stock price performance. By spinning off flash, the logical combination of existing flash partners would achieve consolidation that the NAND market requires, doing so across an already shared technology base.

As mentioned in previous Trendfocus Executive Briefs, no one company has ever successfully managed both HDDs and flash businesses over the long term. While both are key storage enablers that will exist well into the future, the 2 technologies are vastly different in how they are developed and managed. Investment dollars to drive both flash and HDD into the future are significant and cannot be shared across technologies. The coming weeks will continue to hint at the next chapter for Western Digital and will define a significant milestone in storage technology directions.