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China Yanks Western Digital Funds On U.S. Probe; SanDisk Deal At Risk

China’s Tsinghua Holdings pulled its $3.8 billion investment in Western Digital ( WDC ) early Tuesday amid a U.S. government inquiry, prompting the disk drive maker to slash its already threatened bid for flash memory maker SanDisk ( SNDK ). The SanDisk acquisition, announced Oct. 21, will have to hurdle a Western Digital shareholder vote, which would not have been required with the investment by Tsinghua subsidiary Unisplendour. Western Digital stock sank 7.2% to 42.77 on the stock market today , while SanDisk stock lost 1.6% to 66.61. Western Digital Investor Opposes Bid On Monday, Western Digital investor Alken Asset Management wrote an open letter claiming the $19 billion offer for SanDisk was “simply too high.” SanDisk, an Apple ( AAPL ) supplier, faces competitive headwinds in 2016. Alken owns about 2% of Western Digital stock. The vote is slated for March 15. The Unisplendour investment would have given it a 15% stake in Western Digital. Unisplendour terminated its Western Digital investment after the Committee on Foreign Investment in the U.S. said it would investigate. Neither Western Digital nor Unisplendour will pay a termination fee. In December, Summit Research analyst Srini Sundararajan told IBD that Tsinghua Holdings was trying to get its hands on SanDisk technology. Chip-arm Tsinghua Unigroup plans to invest $47 billion in semiconductor technology to become the world’s No. 3 chipmaker, leapfrogging  Qualcomm ( QCOM ). It wouldn’t be the first time a Tsinghua Holdings bid for U.S. technology was shuttered on regulatory concerns. A rumored $23 billion bid for Micron Technologies ( MU ) by Tsinghua Unigroup seemingly fell flat last year on worries that CFIUS would stop the deal. Micron shares fell 5.1% to 10.49. SanDisk Acquisition Remains ‘Compelling’ By terminating its Western Digital investment, Unisplendour triggered an alternative deal between Western Digital and SanDisk. Western Digital will now pay $67.50 per share in cash and 0.2387 in stock for SanDisk, for a value near $78.50 per share at Western Digital’s Monday closing price. The original deal valued SanDisk at 86.50 a share. Despite the failed Unisplendour bid, the demand for data storage is rising, Western Digital CEO Steve Milligan said Tuesday in a statement. By acquiring SanDisk, Western Digital would get easy access to Nand (flash memory). “We believe the strategic rationale of 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,” Milligan said in the statement. The SanDisk deal has been expected to close in Q2. Western Digital said it continues to see $500 million in synergies within 19 months of the closure and $1.1 billion by 2020. If the deal fails, Western Digital must pay SanDisk $184 million. Toshiba Could Benefit Western Digital RBC analyst Amit Daryanani sees the Western Digital-SanDisk deal being 34% dilutive without the Unisplendour investment. The ongoing shift to 3D Nand has pressured average sales prices for SanDisk’s bread-and-butter Nand business, he wrote in a research report. “While we think the long-term rationale of owning HDD (hard disk drive) and Nand under one umbrella is logical, the near-term implications of this could be negative,” he wrote. Needham analyst Richard Kugele notes the $17 billion debt that Western Digital will incur if it acquires SanDisk. But a partnership with Toshiba via SanDisk could buoy Western Digital. Toshiba manufactures SanDisk’s Nand. “Nothing will change the aggressive nature of the Nand industry, but partially owning a fab through the Toshiba partnership should help Western Digital over time navigate those waters,” Kugele wrote in a research report. Daryanani rates Western Digital stock outperform and has a 68 price target. Kugele rates Western Digital stock a strong buy and has a 90 price target.

Apple Watch Shipments Slowed In Holiday Quarter

Shipments of Apple ‘s ( AAPL ) smartwatch, the Apple Watch, slowed in the fourth quarter, as the rest of the wearable device market jumped for the holiday shopping season. Market research firm IDC on Tuesday said Apple shipped 4.1 million Apple Watch units in Q4, up 5.1% from the 3.9 million units it shipped in Q3. That growth is down from the 8.3% increase in Apple Watch shipments in the third quarter compared with Q2, when the product debuted. Shipments of wearable devices excluding Apple’s rose 17.9% from Q2 to Q3 and 36.3% from Q3 to Q4, according to IDC. Fitness device maker Fitbit ( FIT ) remained the top maker of wearables worldwide in the fourth quarter. It shipped 8.1 million devices, giving it 29.5% market share, IDC said. That’s up from 22.2% market share in Q3 and 24.3% in Q2. Apple claimed second place with 15% market share, down from 18.6% in Q3 and 19.9% in Q2. China-based Xiaomi placed third with 9.7% market share, followed by Samsung (4.9%) and Garmin ( GRMN ) (3.5%). Total industry shipments of wearable devices reached 27.4 million units in Q4, IDC said. That’s up 30.4% from Q3 and 126.9% from Q4 2014. “Triple-digit growth highlights growing interest in the wearables market from both end-users and vendors,” IDC analyst Ramon Llamas said. “It shows that wearables are not just for the technophiles and early adopters; wearables can exist and are welcome in the mass market.” The wearables market is currently dominated by fitness bands and smartwatches, but it’s likely to diversify into other forms, such as smart clothing, footwear and eyewear, IDC analyst Jitesh Ubrani said in a report. Fitbit remains the “undisputed worldwide leader” in wearables, thanks to its well-segmented device portfolio, focus on fitness, a fast-growing corporate wellness program and extended market reach around the world, IDC said. Apple grew its Apple Watch unit volumes only slightly in Q4 from the previous quarter despite expanded distribution and holiday sales promotions, IDC noted. Expectations are higher for the company’s next-generation Apple Watch, which could leverage Apple’s platforms like HealthKit and bolster connectivity capabilities, IDC said. A second-generation Apple Watch could be revealed as soon as next month, when Apple is planning to hold its spring product briefing. RELATED: Fitbit Q4 Beats, But Q1 Targets Disappoint; Stock Plunges Late Smartwatch Shipments Skyrocket In Q4, Passing Swiss Watches .

Apple’s Clash With Feds Over IPhone Encryption Not Hurting Brand

U.S. consumers are largely ambivalent about Apple ’s ( AAPL ) fight with the FBI over unlocking an encrypted iPhone, according to a new survey. Investment bank Piper Jaffray surveyed 1,002 U.S. consumers regarding their perception of Apple’s brand in the face of its legal clash with federal authorities. “Net-net, the data showed that there was no brand impact from Apple’s decision to refuse to unlock an encrypted iPhone, with essentially equal numbers of consumers viewing the brand more positively and less positively, with the rest viewing it the same or unaware of the situation,” Piper Jaffray analyst Gene Munster said in a research report Tuesday. Last week, a federal judge sided with the FBI and ordered Apple to create software to hack into an iPhone 5C belonging to one of the shooters in the Dec. 2 attack in San Bernardino, Calif., that left 14 people dead. Apple CEO Tim Cook said that complying with the order would set a “dangerous precedent” that would undermine the security and privacy for all iPhone users. Piper Jaffray’s online survey showed that 24.1% of respondents viewed Apple’s brand more favorably in light of its refusal to hack its iPhone security protections, while 23% viewed the brand less favorably. Of the rest, 17.8% said that they viewed the brand the same, and 35.1% said that they didn’t know anything about the story. “We believe that the U.S. market is likely more politically influenced than international markets (i.e. international markets would skew more favorably towards Apple if it continued to refuse to unlock the phone in question), but generally believe that regardless of the outcome of the dispute, it will not have a meaningful impact on Apple’s brand,” Munster said. On Monday, Apple CEO Tim Cook called for the formation of a government commission or panel to discuss the broader issues involved with smartphone encryption. Meanwhile, Facebook ( FB ) CEO Mark Zuckerberg came out in support of Apple in the case. Speaking at the Mobile World Congress trade show in Barcelona, Spain, Zuckerberg said that weakening the digital security of technology companies was a bad idea, the New York Times reported . “I don’t think building backdoors is the way to go, so we’re pretty sympathetic to Tim and Apple,” Zuckerberg said. In an interview with the Financial Times, Microsoft ( MSFT ) co-founder Bill Gates sided with the government in the case, saying that Apple should help the FBI in this instance. However, in a later interview with Bloomberg, Gates softened his stance, PC W0rld reported .  Ultimately, he said, Congress will decide the issue of smartphone encryption. Apple stock was down 1.5% in afternoon trading in the stock market today .