Western Digital Needs Urgently to Buy SanDisk

Currently three companies, Micron, Western Digital and China state-controlled Tsinghua Unigroup, are rumored to be interested to acquire SanDisk. At a time, there was also speculation that Seagate could be a buyer.

Our opinion is that Western Digital needs urgently to buy SanDisk – and we could also said the same for Seagate – , a possibility as SanDisk is for sale and hired a bank to explore a potential sale of the company.

The reasons for WD to do it:

The market of HDDs, where WD is the leader, is going to be down in the years coming and the company will see revenue decreasing if it does not diversify. On the other side, the market of solid-state disks will grow rapidly. For a long time, WD, as well as Seagate, claim that flash was not threat to HDDs, but were obliged to change their mind. WD needs to invest in SSDs to compensate. Even if it already spent a lot of money in this field with acquisition of sTec, Velobit, Virident and Skyera), it remains a tiny player in the sector but for SAS SSDs through subsidiary HGST.

Today it will be quite impossible for WD – and also Seagate – to build their own manufacturing facilities to make flash chips. The price to invest in such a business is in dollar billions and the two firms do not have the fundamental technologies to do it.

As we wrote before, the flash chip makers will finally be the winner in the SSD market because chip is THE core component of the drives. They are only five currently and no one is for sale:

Intel/Micron in USA and Singapore
Samsung in USA, China and Korea
Toshiba in Japan – with SanDisk as a partner
SK Hynix in China and Korea
Powerchip in Taiwan

SanDisk is a strong player in all the components of the flash industry: chips (with Toshiba), memory cards, USK keys, consumer and enterprise SSDs (SATA, SAS, PCIe, UltraDIMM) with their controllers, and also all-flash solutions. But Toshiba is the supplier of flash chips for SanDisk and the two companies have an important IP-sharing joint venture. It’s not sure that the Japanese firm will pursue the same agreements with WD if the acquisition happens. Don’t forget also that Toshiba and WD are fierce competitors in HDDs.

That’s the good time to buy SanDisk, with recent bad financial results, to get a good price. Market cap of the flash company today is only $14.3 billion according to Yahoo! Finance. For the last financial quarter ended June 28, 2015, the $6.6 billion firm reported once again a poor period: revenue decreased 24% Y/Y and 7% Q/Q, net income being down 52% Y/Y and 108% Q/Q even if business is supposed be better in the current three-month period. Estimate for FY15 revenue remains within the range of $5.4 billion to $5.7 billion, which means a huge decline from FY14 – from 14% to 19% – for a company in a growing market. One of the main reason is the huge decline of Apple as OEM for SSDs. Stock has dropped around 37% year-to-date also because of falling prices in the flash memory market and lean inventory levels.

WD has the money to get SanDisk. Total cash and cash are equivalents of $5.0 billion. Furthermore, the recent addition of $3.8 billion from Unisplendour from China to get 15% stake in the HDD maker can help and we know that China is ready to invest a lot to enter into chip manufacturing. Issuing shares or debt could cover the rest of the purchase.