‘Melting Franchise’ SanDisk Bad For Western Digital: Investor
Western Digital ( WDC ) investor Alken Asset Management is pushing the disk drive maker to send Apple ( AAPL ) supplier SanDisk ( SNDK ) back to the sales block, and Western Digital and SanDisk shares split the difference today on Wall Street. Western Digital stock bounded 4.5% on the stock market today , while SanDisk stock slumped 1.7%. The companies’ shares have plunged 34% and 10%, respectively, since the $19 billion deal was announced Oct. 21. At the time, the transaction was at a 70% premium to SanDisk’s stock price, Alken analyst Vincent Rech wrote in an open letter to Western Digital shareholders. “The price being paid for SanDisk is excessive in light of the changing landscape for SanDisk’s products and capital markets considerations,” he wrote, noting that Western Digital would be forced to take on $14 billion in debt to fulfill the deal. “SanDisk, specifically, has suffered significant business challenges recently, causing us to worry as well about paying top dollar for a melting franchise,” he added. Since the deal was announced, competition in the Nand (flash memory) field has expanded, squeezing demand, he wrote. Now, a key element of SanDisk’s sales is under attack. Hours before Western Digital and SanDisk announced their merger, Intel ( INTC ) unveiled its $5.5 billion plan to convert its Dalian, China, facility to ramp non-volatile memory. Intel and Micron Technologies ( MU ) jointly developed 3D Nand and 3D XPoint in 2015. And Tsinghua Unigroup’s entrance into the chip industry will only stoke more competitive fires, Rech wrote. The Chinese conglomerate plans to invest $47 billion to become the world’s No. 3 chipmaker. To that end, Tsinghua invested $3.8 billion in Western Digital in the month following the SanDisk acquisition plan. Further, SanDisk is dependent on Toshiba for Nand manufacturing. Earlier this month, Toshiba reported its biggest annual loss. And earnings forecasts for SanDisk — as well as its Nand-rivals Micron, Toshiba, Samsung and SK Hynix — have dropped 30% since the deal was announced. “The market now expects the Nand market to be more competitive — and profit more elusive — than the time the transaction was originally negotiated,” he wrote. In 2015, SanDisk reported $616 million in operating income — the lowest level since 2009 — and well below the $1.5 billion in four of five years that ended Dec. 31, 2014, Rech wrote. Last year, SanDisk suffered from major revenue losses from top customer Apple. Acquiring SanDisk gives Western Digital quick access to the Nand chips needed for its solid-state-drive business, Rech wrote. But that only comprised 7% of Western Digital’s total sales in 2015. Alken plans to vote on March 15 against the merger. Should the deal fail, Western Digital would be required to pay SanDisk $185 million.