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Western Digital (WDC)-Kioxia Deal May Get Japan's Support

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Western Digital’s (WDC - Free Report) potential merger with Kioxia Holdings might be supported by Japan's trade ministry only if the “control of cutting edge technology stays in Japan”, according to a Reuters report. There was no official word on the matter from any of the involved parties.

Western Digital needs to come up with a plan that can be acceptable for both the countries, added Reuters citing sources familiar with the matter.

In August 2021, The Wall Street Journal had reported that Western Digital was eyeing Kioxia in a deal worth more than $20 billion. The combined company will likely be run by Western Digital’s CEO David Goeckeler. The deal could also fall flat and Kioxia could go ahead with its proposed plans of floating initial public offering (IPO), noted the WSJ report.

Last week, in a separate report, Reuters, citing Nikkan Kogyo newspaper, had noted that Kioxia was planning to float an IPO as early as November 2021.

Headquartered in Tokyo, Kioxia is one of the well-known suppliers of flash memory and solid state drives (SSDs) globally.


Implications of Western Digital- Kioxia Merger

According to Reuters, if the Western Digital-Kioxia deal comes to fruition, the combined company will hold 34% share of the lucrative NAND flash market, which is dominated by the likes of Samsung, SK hynix and Micron. Kioxia and Western Digital currently work together for flash NAND memory production.

The NAND flash memory market is expected to witness a CAGR of 11.3% between 2021 and 2026 and reach $85.36 billion, according to a Mordor Intelligence report.

The market is being driven by a rebound in the smartphone market. Higher need for storage capacity in smartphones is driving demand for NAND flash memory. The accelerated deployment of 5G technology is also expected to boost demand for 5G smartphones, which will fuel demand for NAND memory, added the report.

Pandemic-induced work from home and online learning is driving demand for laptops and PCs, which is another factor driving the NAND market along with a spurt in video gaming activity, globally.

To gain a larger share of the market, South Korea-based SK hynix had announced that it was buying Intel’s (INTC - Free Report) NAND memory and storage operations for $9 billion in October 2020. The takeover includes Intel’s NAND component and wafer business, NAND solid state drive (SSD) business but excludes the chipmaker’s Optane modules business operations. The deal also includes Intel’s Dalian NAND memory manufacturing facility located in China. The deal is awaiting regulatory approval.

However, the road is bumpy for the merger with Kioxia. Last week, Bloomberg had reported that the deal could be opposed by Chinese regulatory authorities amid strained U.S.-China relations.

The proposed value of the Kioxia deal is higher than Western Digital’s market capitalization of approximately $18.96 billion as of Sep 3, 2021. This makes the deal challenging for Western Digital. Also, the company’s long-term debt (including current portion) stood at $8.725 billion, while cash and cash equivalents were $3.37 billion at the end of the last reported quarter.

Zacks Rank & Key Picks

At present, Western Digital carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Avnet (AVT - Free Report) and Paycom Software (PAYC - Free Report) . Both the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Long-term earnings growth rate of Avnet and Paycom is pegged at 25.4% and 25%, respectively.