Toshiba Corp. will struggle to sell its flash memory business without the acquiescence of Western Digital Corp., a fact the Japanese company seemingly ignored today when it signed a memorandum of understanding calling for the conclusion of acquisition talks with a potential buyer by the end of September. Even if Toshiba and the Bain Capital Private Equity LP-led consortium reach an agreement on the sale of Toshiba Memory Corp., the emerging company will likely face years of protracted litigation that will prove distracting to management and hobble its success.
So, here’s one piece of advice Toshiba should consider as it moves ahead with the transaction: resume discussions with and first reach an agreement with Western Digital about the future of the flash memory business. A worthwhile deal with Western Digital could offer the American disk drive maker significant financial and supply concessions in compensation for its interest in the two companies’ joint venture, giving it sufficient reasons to jettison its counter offer for the flash memory unit and throw its support behind a third-party buyer.
Toshiba appears to be moving in a different direction, however. The company today announced the signing of the MOU with Bain, whittling down the competition and establishing a leading position for the chosen suitor while failing to address Western Digital’s concerns. What this means is that one of the messiest M&A deals in the history of the semiconductor industry will not be wrapped up anytime soon.
“Bain has come forward with a new proposal,” Toshiba said in a statement. “Toshiba’s Board of Directors has determined to continue negotiations with the Bain-led consortium on the basis of this new proposal, and the company will work to expedite the conclusion of a stock purchase agreement by the end of September.”
“Toshiba intends to reach a definitive agreement that fully meets our objectives at the earliest possible date,” added Yasuo Naruke, senior executive VP of Toshiba, said in the statement. “The sale of TMC must promote further growth of TMC’s memory business, and return Toshiba group to positive equity.”
Although unstated, Toshiba’s announcement represents a temporary freezing of talks with Western Digital and another suitor, Hon Hai, a division of Foxconn Technology Group, the World’s No. 1 electronics manufacturing services provider and a top contractor to Apple Inc. The U.S. consumer electronics giant is believed to be interested in the outcome of the transaction and has reportedly warned it may stop sourcing components from Toshiba Memory if Western Digital emerged as the winner.
EPSNews believes the reported opposition of Apple to Western Digital’s offer is a minor distraction and shouldn’t weigh too heavily on Toshiba’s decision. Apple is one of the top buyers of flash memory in the market but while its hefty purchasing budget confers considerable leverage as a buyer, the OEM will not damage its own supply chain by permanently excluding Toshiba Memory from its approved vendors’ list, especially if or when other suppliers cannot meet its procurement needs. There is precedence for this position. Apple, for example, is locked in a fractious battle with rival Samsung Electronics in the wireless handset market but it has repeatedly returned to the Korean company for supply of essential components.
Foxconn may have come to the end of its involvement in the Toshiba Memory deal. The EMS provider has a more tenuous position; its efforts to build a vertically-integrated supply chain as a contract manufacturer is already dimly viewed by many OEMs so the addition of a major memory maker to its operation could only cause further consternation in the industry.
The toughest challenge to Toshiba unloading its memory business to the Bain Capital-led consortium therefore remains Western Digital, which is not only itself a suitor but has existing contractual joint venture engagement with the Japanese company through SanDisk. There is no going around that relationship and, despite today’s announcement, nobody should rule out Western Digital. Even Toshiba admitted that today’s decision was non-binding, leaving itself open to other suitors.
“The signing of this MOU does not eliminate the possibility of negotiations with other consortia,” the company said.
Western Digital, too, may have to improve on its offer for Toshiba Memory or agree to sell its interest in the JV at a premium and on terms that would protect its sourcing needs. The Bain Capital-led group probably understands this is a wrinkle it might be compelled to accept as a condition for sealing the transaction. For now, though, Western Digital continues to play hardball.
Within minutes of Toshiba’s announcement, Western Digital issued a statement expressing its disappointment at Toshiba’s action. The company pointed out the strength of its legal position in relations to the transaction, referencing the joint venture between Toshiba Memory and SanDisk, which it acquired in 2016. It said:
We are disappointed that Toshiba would take this action despite Western Digital's tireless efforts to reach a resolution that is in the best interests of all stakeholders. Throughout our ongoing dialogue with Toshiba, we have been flexible, constructive and have submitted numerous proposals to specifically address Toshiba's stated concerns. Our goal has been — and remains — to reach a mutually beneficial outcome that satisfies the needs of Toshiba and its stakeholders, and most importantly, ensures the longevity and continued success of the JVs.
Furthermore, it is surprising that Toshiba would continue to pursue a transaction with a consortium led by Korea-based SK Hynix Inc. and Bain Capital Japan without SanDisk's consent, as the language in the relevant JV agreements is unambiguous, and multiple courts have ruled in favor of protecting SanDisk's contractual rights. We remain confident in our ability to protect our JV interests and consent rights.
Eventually, this tortuous sale will not be resolved in a courtroom; very few mega deals are ever sealed through a legal battle. Eventually, Western Digital and Toshiba will have to resolve their differences behind closed doors even if this does not involve the sale of the memory maker to the American company.
It is not in Western Digital’s interest to walk away from the Toshiba Memory deal without putting up a stronger fight and EPSNews expects the company to sweeten its offer for the Japanese flash maker even as it persists with the legal arm wrestling that has so far frustrated efforts by the seller to unload the unit to a different buyer.
Today’s decision by Toshiba to continue discussions with the Bain Capital-led group may eventually succeed but this won’t happen without considerable concessions to Western Digital.
Bolaji Ojo is editor-at-large of EPSNews. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.