(Bloomberg) — Western Digital Corp. presents a new proposal to Kioxia Holdings Corp. four years after it lost in a bid to buy Toshiba Corp.’s former chip unit. to take over. But the US company’s offering encounters well-known hurdles.
Among the challenges is that Kioxia’s senior management prefers to go public, officials in the Japanese government are concerned about losing control of a chipmaker, and Chinese regulators are likely to block a US takeover, according to people familiar with the matter. Kioxia plans to make an initial public offering next month to capitalize on strong investor demand for chip stocks, said one of the people, who asked not to be named because the business is private.
Western Digital and its bankers have been aggressive in setting up a deal, bidding a high price and describing it as a merger, the people said. Bain Capital, which controls Kioxia with Toshiba, is open to a combination, one person said.
Political opposition is perhaps the biggest hurdle. The Japanese government has always protected its high-tech companies, and the powerful Ministry of Economy, Trade and Industry helped settle the bidding war four years ago when Toshiba sold a majority stake in the chips unit to the Bain-led consortium.
One faction at METI is open to discussing a Western Digital deal, but another faction is against a sale, one person said. The Japanese government plans to invest billions of dollars in advancing the domestic semiconductor industry, so losing control of its most prominent chipmaker seems counter to that goal.
METI has not yet decided whether the deal will be approved. Prime Minister Yoshihide Suga and Akira Amari, the politician who favors local investment in semiconductors, are likely to make the final decision, one person said.
China is a bigger hurdle. Beijing is increasingly resisting approving acquisitions by US companies as tensions with the US government mount. Chinese regulators must approve the proposed acquisition of SoftBank Group Corp.’s Arm Ltd. by Nvidia Corp. yet to approve — many analysts declare that the deal is effectively dead.
Chinese approval of a Kioxia sale can also be problematic. If the memory chip maker were to fall into the hands of an American company, it would be directly subject to any sales restrictions imposed by the administration of President Joe Biden. Kioxia’s management runs the risk of getting caught up in a merger agreement that China could review — and then reject — for a year or two.
“The deal is of no value to Kioxia,” said Akira Minamikawa, an analyst at Omdia.
He pointed out that Kioxia and Western Digital are already collaborating on the production of NAND flash memory. The US company would likely use its control to shift the balance to memory chips for personal computers, rather than smartphones, as Kioxia has preferred.
“By buying Kioxia, Western Digital wants to change the allocation of output for the greatest benefit to the US company,” he said.
The world is short of computer chips. Here’s why: QuickTake
The deal is already financially a stretch for Western Digital. The proposed acquisition, which would be done with cash and stock, would value the target at more than $20 billion, one person said. Western Digital’s market value is just below that level.
Certain factors have changed in favor of a deal since Western Digital failed in its bid four years ago. Chief Executive Officer Steve Milligan, who was in charge at the time and infuriated top executives at Toshiba, left his post last year. Yasuo Naruke, the former CEO of Toshiba Memory who fought vigorously against the takeover, passed away last year.
Relations between the two companies are less bitter, but not warm. Milligan’s replacement is David Goeckeler, who has been put forward as the likely candidate to lead the combined company.
But Kioxia has not yet reached an agreement on who will take over as CEO or which top executives will lead management, one person said. The structure has not been determined.
Japanese financial institutions, which would likely be required to fund a deal, have not yet been involved, the person said. Financing should be worked out after the deal structure is finalized.
More stories like this are available on bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg LP