Unisplendour Corporation (Unis), a subsidiary of Tsinghua Unigroup, announced that it is cancelling its attempted $3.775 billion equity investment in Western Digital (WD) due to intervention by CFIUS (Committee on Foreign Investment in the United States), a U.S. government agency that protects vital technology assets that are key to U.S. national security. CFIUS announced its intentions to open an investigation into the investment.
The Chinese state-owned Tsinghua Unigroup has been on a well-publicized mission to obtain and develop the necessary IP to empower native Chinese production of CPUs, DRAM and NAND. One of Tsinghua’s many efforts to obtain critical NAND IP began with its attempts to purchase Micron, which were rebuffed due to an almost certain blocking maneuver by CFIUS.
Nonplussed and undeterred, Tsinghua Unigroup’s subsidiary Unis announced its intentions to invest $3.775 billion in WD, thus gaining control of 15 percent of the company and a seat on WD’s board. The investment appeared to kick off a chain reaction, as the Chinese MOFCOM regulatory authority almost immediately approved the long-overdue HGST/WD merger.
Within three weeks of the announcement of the Unis investment, WD announced its intentions to purchase SanDisk for $19 billion. The WD/SanDisk agreement carried several stipulations that materially altered the terms of the acquisition if the Unis investment did not complete as planned. WD offered to pay $85.10 per share and 0.0176 of WD common stock per share of SanDisk common stock if the Unis investment cleared. However, with the Unis investment off the table, WD will only pay $67.50 per share and 0.2387 per share.
WD intends to carry on with the merger, and released a statement.
“We continue to look forward to our transformational combination with SanDisk and capitalizing on the growth opportunities ahead of us as the demand for data storage continues to increase, despite the inability to carry out the equity investment by Unis,” said Steve Milligan, chief executive officer of Western Digital. “We believe the strategic rationale for this acquisition is even more compelling today than when we first announced it in October last year given industry trends and strong execution by both companies.”
One of the most important changes to the terms is that the SanDisk merger is now subject to a vote from WD’s investors, which would not have been the case if the Unis investment was successful.
There are a number of reasons that the SanDisk merger makes perfect sense for WD, including access to the lucrative SSD market that is placing severe pressure on the HDD manufacturers. There are also competing schools of thought that point out product redundancies and management problems at SanDisk that have led to disastrous results for the company.
The dissenters feel that WD is investing far too much for what is essentially a distressed asset. The Alken Asset Management group has risen as a vocal detractor of the WD/SD merger plans, and there is apparently a groundswell within the WD investor ranks that feels the merger is a poor decision—WD stock has fallen 40 percent since the announcement of the acquisition.
If WD cancels the acquisition it will have to pay a $185 million termination fee to SanDisk, a pittance considering the billions at stake. In either case, WD will continue in its JV with Unis that sells its storage systems in the Chinese market, barring any other U.S. intervention.
WD’s shares are down a mere 1.87 percent at the time of this writing—but we are only a few hours out of the announcement. The real impact will likely be felt with the impending shareholder vote on the SanDisk merger. Interesting times indeed.
