June 30, 2022
After a lapse of six years, storage equipment giant Western Digital may make another major strategic adjustment. In an official statement released this month, Western Digital said it may split itself into a company focused on traditional computer HDDs and a NAND flash memory company.
Western Digital is headquartered in San Jose, California, and its current business is mainly HDD mechanical hard drives and NAND flash memory, and has a strong market position in the two major markets.
Data in the second quarter of 2021 shows that Western Digital ranks second in the industry in terms of shipments of mechanical hard drives, followed by Seagate and Toshiba. Second, Samsung occupies the first place, followed by Kioxia, SK Hynix, Micron, and Kingston.
Western Digital was originally the number one player in the global HDD mechanical hard disk market. In 2016, it entered the NAND flash memory industry through the acquisition of Sandisk. Later, in January 2020, it proposed to acquire the world's second largest flash memory manufacturer, Kioxia. At present, the Kioxia merger has not yet been implemented, but there is news of a spin-off.
From successive mergers and acquisitions to planned spin-offs, Western Digital's series of trends are affecting the entire NAND chess game.
Western Digital CEO David Goeckler said in a statement: "We are actively participating in a wide range of strategic and financial alternatives that will help further optimize the company's value, including US investment management firm Elliott Management's proposal to invest incremental equity capital in Our NAND Flash business.
In fact, the immediate impetus for splitting Western Digital in two came from the company's activist investor, Elliott Management. In May of this year, Elliott, who holds about 6% of Western Digital's shares, wrote to the company's board of directors, calling for a comprehensive strategic review and promoting the spin-off of the two major businesses of NAND flash memory and HDD mechanical hard drives.
In 2016, Western Digital spent $19 billion to buy flash memory manufacturer SanDisk, and began to operate both HDD mechanical hard drives and NAND flash-based SSDs. Elliott called the deal "a major change." However, Western Digital has integrated the two businesses into the same company, which lags behind in terms of operation, finance and strategy, and fails to give full play to the synergy of mergers and acquisitions.
The current market valuation of hard disk manufacturers’ assets is relatively low. As of the close on June 17, Eastern Time, Western Digital’s market value is about $14.5 billion, and Seagate’s current market value is about $15.6 billion. Eliott estimates Western Digital's flash memory division is worth between $17 billion and $20 billion as a stand-alone company. This also means that splitting the NAND business will indeed be a solution in the interests of investors.
Elliott also believes that Western Digital should consider a spin-off, not only to make the two businesses more successful, but also to create more value. Specifically, the flash drive business alone could be worth as much as $20 billion, similar to Western Digital's current market cap. At the same time, Western Digital's stock price will rise, topping $100 a share by the end of 2023. Elliott also offered to provide more than $1 billion in incremental equity capital to Western Digital's flash memory business to help spin off or sell the flash memory business.
It is worth noting that Samsung Electronics also said in 2016 that it was considering a split based on the advice of activist investors, which was also a response to Elliott. In October of the same year, Elliott wrote to Samsung Electronics, suggesting that Samsung Electronics should be split into a holding company and an operating company to maximize shareholder value.
At the time, Elliott’s affiliates held less than 1% of Samsung Electronics’ shares, and the proposal was not finalized. But Elliott, who currently holds a 6% stake in Western Digital, will have more weight in his words.
As far as the spin-off strategy itself is concerned, the options that Western Digital currently sees are not a rare attempt in the technology industry in recent years. Toshiba had previously announced a three-part division to simplify business, reduce debt and adjust performance.
Market turns, Western Digital continues to bet on NAND
Western Digital is considering a spin-off or sale of the NAND business after marrying SanDisk. Instead, Western Digital has been moving toward the NAND market.
Western Digital has been focusing on HDD mechanical hard disk products for a long time, which are important components for data storage in personal computers and servers, with outstanding advantages in low price and large capacity. However, some markets are turning to SSD technology, which is based on NAND particles and features high-speed read and write and low power consumption.
The global SSD market shipments continue to rise, and some voices believe that the future of the storage industry will be dominated by NAND-based solid-state drives. Following this trend, Western Digital successfully married NAND manufacturer SanDisk in 2016 and acquired SSD technology and production capacity, becoming an important NAND and SSD player in one fell swoop.
Before that, rival Seagate's acquisition of flash controller developer SandFore in 2014 was also seen as an effort to strengthen the SSD business. The deal enables Seagate to improve the performance of its SSD products and gain access to other related technologies, making it the world's second-largest developer of PCIe flash memory controllers.
Recently, Western Digital has returned to the industry spotlight after its strategic options for the spin-off of its business were made public, and the industry has once again paid attention to the progress of its $20 billion acquisition of Kioxia. The Wall Street Journal, citing people familiar with the matter, said Kioxia remains open to a possible deal with Western Digital. The two companies have been in discussions since early 2021, but talks have stalled, in part because Western Digital's stock price has fallen.
Although the progress of mergers and acquisitions is blocked, it can still be seen that Western Digital continues to make efforts in the NAND market. At the same time, various signs are also demonstrating the possibility of an upward performance in the NAND and SSD markets.
The president of Kioxia said in April this year that the demand from smartphones and data centers is very large, and the total demand for NAND is expected to grow at a rate of about 30% per year, and the company has therefore doubled its production capacity. Samsung, the leader in NAND, is also expanding production. Samsung's No. 2 NAND plant in Xi'an started mass production in the first half of this year. It is expected that after the new plant is launched, the monthly production capacity of NAND in Xi'an will increase to 250,000 pieces per month.
Whether in the consumer market or the data center market, the penetration of solid-state drives is becoming more and more sufficient.
Solid-state drives have become the primary storage medium for desktop computers and notebooks. In 2019, the usage rate of solid-state drives in PCs reached 60%, surpassing mechanical hard drives. According to a recent report from data storage industry analyst firm Trendfocus, OEMs have disclosed that Microsoft is pushing them to ditch HDDs as the primary storage device for pre-built Windows 11 PCs in favor of solid-state drives. In the data center market, HDDs and SSDs will coexist for a long time. However, considering SSD capacity, cost improvement and its low power consumption advantages, more and more data centers are beginning to use SSDs
Changes in the stored chess game
The highly concentrated storage industry is not monolithic. In the DRAM industry, Samsung, SK Hynix, and Micron have already established three pillars, but the NAND industry has shown a trend of restructuring.
In the NAND market, Samsung Electronics holds the No. 1 market share with a market share of about 35%. If Western Digital, which is ranked No. 4, successfully purchases Kioxia, it can become No. 2 in the industry and compete with Samsung. Coupled with the previous move by SK Hynix to acquire Intel's storage business, Western Digital's next acquisitions will leave only four major players in the NAND industry.
Under the changes in the NAND chess game, the role of activist investors cannot be ignored. What the market can imagine afterwards is the influence of economies of scale in the memory market and the stronger pricing power of NAND manufacturers. Even if the acquisition of Kioxia is blocked, Western Digital's spin-off to strengthen the flash memory department will be a move worthy of the attention of the NAND industry.