The Nihon Keizai Shimbun reported on August 25 that Toshiba and Western Digital (WD) buried the hatchet to tackle Samsung Electronics in the flash memory market.
On August 24, Toshiba changed the preferred bidder for the sale of Toshiba Memory Corporation to the WD consortium from that selected two months ago. The latter consists of SK Hynix, Innovation Network Corporation of Japan (INCJ), Development Bank of Japan (DBJ), and Bain Capital. The former includes INCJ, DBJ, and Kohlberg Kravis Roberts (KKR).
Toshiba changed its mind as WD put pressure by means of litigation and main banks urged it to complete the process within this month. The Nihon Keizai Shimbun said that Samsung Electronics’ predominance in the global flash memory market was another factor.
Toshiba and WD have produced NAND flash memory products together at the former’s facilities located in Yokkaichi, Japan. WD recently acquired SanDisk in order to respond to the demand for flash memories that is surging these days. SanDisk’s main products include flash memories for mobile devices.
Nowadays, the global hard disk drive market is shrinking while the flash memory market is showing a rapid growth. According to market research firm IHS Markit, the size of the global NAND flash memory market reached US$36.7 billion last year and is likely to grow 40% until 2021.
Samsung Electronics further strengthened its dominant position in the flash memory market while Toshiba and WD had some conflict over the sale of the subsidiary of Toshiba. In the first quarter of this year, Samsung Electronics’ market share rose 2.9 percentage points from a year ago to 36.7% whereas Toshiba’s fell 4.5 percentage points to 17.2% and WD’s fell 0.5 percentage points to 15.5%.
According to the Nihon Keizai Shimbun, WD’s sense of crisis was also based on the announcement on Yokkaichi plant expansion that was made solely by Toshiba early this year during the conflict. WD completely relies on the Yokkaichi plant in producing memories and cannot procure up-to-date products without taking part in capital investment. At present, the plant is co-owned by Toshiba Group and WD. If an entity other than WD acquires Toshiba Memory, the ownership relationship can become complicated to affect plant operations.
The Japanese newspaper reported that Toshiba and WD can have a combined market share of over 30% by reuniting and the top management of both WD and Toshiba are not willing to cut their relationship. In other words, the two sides opted to make a concession to make their move with three-dimensional semiconductor devices with the global semiconductor market enjoying an unprecedented boom.
In the meantime, Reuters reported the same day that the WD consortium is likely to suggest a price of 1.9 trillion yen for Toshiba Memory acquisition. According to the report, WD is expected to invest 150 billion yen via convertible bonds without demanding voting rights, each of INCJ, DBJ, and KKR is forecast to come up with 300 billion yen, and main banks such as Sumitomo Mitsui and Mizuho are expected to increase their credit line by approximately 700 billion yen with some other Japanese companies investing about 50 billion yen. Then, Toshiba can maintain its stake at approximately 100 billion yen and Japanese companies’ share can reach 60% or so.
As of the end of March this year, Toshiba’s liabilities exceeded its assets by 552.9 billion yen. This state should be eliminated by March 2018 for it to remain listed. The business value of Toshiba Memory is estimated at 700 billion yen on a book value basis.
If the sale is carried out for two trillion yen, Toshiba can gain a profit of 1.3 trillion yen and the equity capital conversion is likely to cover 800 billion yen or so after taxes. This is sufficient to deal with the excess liabilities.
Toshiba and the WD consortium already started their negotiations but obstacles are also ahead of contract conclusion within this month. For example, it is not easy to prepare two trillion yen or so while lowering the investment ratio to comply with anti-trust laws in different countries.
If the concession does not work, the company has no other option but to choose from other plans for financial improvement. So many parties’ interests are intertwined in the negotiations and it is not clear yet if Toshiba will be able to be content with the result of the process.