Changing Semiconductor Game?
The so—called Korea-US-Japan Alliance which includes SK Hynix was selected as the winner to take over Toshiba's semiconductor business after a long melee. As the future of the world's second-largest NAND flash maker, Toshiba Semiconductor, is determined, a sea change will be made in the world semiconductor industry.
The Korea-US-Japan alliance led by US private equity fund Bain Capital includes SK Hynix, Apple, Dell, Seagate and Kingston Technologies. Three major alliances took part in the acquisition of Toshiba Memory. The three were the Korea-US-Japan Alliance which includes SK Hynix, the New US-Japan Alliance including Western Digital (WD) of the US, and Hon Hai Precision (Foxconn) of Taiwan.
According to Reuters on September 20, Toshiba picked out the Korea-US-Japan Alliance including SK Hynix as the buyer of its semiconductor business at its board meeting on September 20. SK Hynix said, "We have not received any final results yet."
SK Hynix will indirectly own Toshiba through a loan to Bain Capital which holds a 49.9% stake in Toshiba's semiconductor business. Japan has been reluctant to hand over management rights or technology to Korea, a semiconductor powerhouse, or China, which is concentrating on the growth of its semiconductor industry.
Earlier the Korea-US-Japan alliance, which was a strong contender in the acquisition race, was selected as the preferred bidder in June. But then, WD strongly resisted the decision and filed a lawsuit and negotiations have had twists and turns. WD's management right issue surfaced, putting off the decision to sell the semiconductor business. Toshiba's main customer, Apple turned the tide as the company decided to invest about US$3 billion in the Korea-US-Japan Alliance against the acquisition of Toshiba Memory by WD.
In the second quarter of this year, Toshiba's share in the NAND flash market came in second (16.1%) after Samsung Electronics (38.3%). SK Hynix's market share stood at 10.6%, the fifth largest in the industry. WD's share hit 15.8%. SK Hynix, the No. 5 player in the NAND flash market which needs to expand its market share will be able to boost its market control by working with Toshiba. Patent disputes can also be easily avoided through collaboration with Toshiba Semiconductor which has the source technology for NAND flash memories. Although SK Hynix is the world's second-largest DRAM maker, the company has not yet proven itself in the NAND flash and system semiconductor sectors.
However, there is concern among experts who say that they have to pay attention to how many actual profits SK Hynix will make through the deal as SK Hynix does not take over equities with the management right. “The key is how closely SK Hynix will be able to access Toshiba's technology or production volume as SK Hynix wants to get its hands on the technology and production volume, said Song Myung-seop, a research at Hi Investment & Securities. “If the Japanese side with a 50.1% stake limits a leak of technology or production volume after the success of the acquisition, SK Hynix’s investment will be of no value.”
SK Hynix Trying to Get 15% of Voting Rights
SK Hynix will invest a total of 4 trillion won (US$3.6 billion) in Toshiba Memory in Japan. In particular, the company is known to have succeeded in securing the right to acquire a 15% stake in Toshiba Memory. Analysis says that the decision expanded a possibility that SK Hynix and Toshiba will collaborate or forge technology alliance with each other.
In the first place, a concern was raised that SK Hynix might make financial investment only without securing voting rights to Toshiba Memory as the Japanese government will hate to see a Korean company that is a rival to Japanese companies secure voting rights.
SK Hynix announced that the company resolved to invest in Toshiba Memory in a meeting of the board of directors in the morning of September 27. Toshiba memory by the Korea-US-Japan Consortium which includes SK Hynix will pay 2 trillion yen (US$17.7 billion) for the acquisition of the Toshiba Memory and SK Hynix will fork over 395 billion yen (US$3.5 billion).
SK Hynix will invest 395 billion yen (US$3.5 billion) of the total investment amount in the form of convertible bonds and be able to acquire an up to 15% stake in voting rights to Toshiba Memory in the future.
SK Hynix will not directly acquire convertible bonds issued by Toshiba but acquires convertible bonds issued by a special purpose corporation (SPC). SK Hynix will be able to turn such convertible bonds into equities in Toshiba Memory when Toshiba Memory is listed.
The remaining 266 billion yen (US$2.35 billion) will be invested in a fund to be established by Bain Capital with SK Hynix as an LP (limited partner). If Toshiba Memory is listed and its subscription price rises, SK Hynix will be able to enjoy capital gains, too.
A dominant view is that this equity investment will give SK Hynix a bridgehead to overcome its weaknesses. If SK Hynix, the world's fifth largest NAND flash maker, joins forces with Toshiba, SK Hynix will be able to lay the foundation for competing with Samsung Electronics, the No. 1 player in the world NAND flash market.
In addition, on SK Hynix’s part, patent disputes can be easily avoided through collaboration with Toshiba Semiconductor which has fundamental technology for NAND flash memories. SK Hynix is the world's second-largest DRAM maker, but has yet to stand out in NAND flashes and system semiconductors.
In the Korea-US-Japan consortium, which includes SK Hynix, Bain Capital, Toshiba, Hoya, Apple, Kingston, Seagate and Dell, SK Hynix & Bain Capital, Toshiba and Hoya have 49.9%, 40.2% and 9.9% equities in voting rights, respectively. Apple, Kingston, Seagate and Dell will invest in the form of corporate bond-type preferred stocks. In addition, forming the strategic consortium with multinational corporations may bring SK Hynix an opportunity to cooperate with companies that will lead the fourth industrial revolution.
The Korea-US-Japan Alliance is planning to conclude a stock deal with Toshiba and endeavor to complete the sell-off of Toshiba Memory until March 2018.
Under the circumstances, however, according to Japanese media including the Nihon Keizai Shimbun on September 27, Western Digital (WD) announced on September 26 (local time) that it will file a provisional injunction requesting the International Arbitration Court of the International Chamber of Commerce (ICC) to suspend the sale of Toshiba memory.
WD, a joint venture that runs a Toshiba semiconductor plant located in the city of Yokkaichi, Mie Prefecture of Japan with Toshiba, wanted to take over Toshiba Memory but failed and applied for an injunction against the sell-off of the semiconductor business to the international court in May.
However, since it usually takes more than a year for the International Arbitration Court to arrive at a conclusion for arbitration, WD decided to seek an injunction which can put a quick brake on the sell-off of Toshiba Memory.
Now that Toshiba aims to complete the sale of Toshiba Memory by the end of March 2018, WD is aiming to halt the sale process through a disposition by the time. WD expects the results of its application for an injunction to come out within this year at the earliest.
Toshiba will not be able to sell off its memory business until the International Arbitration Court comes to a conclusion about the arbitration lawsuit filed by WD in May of this year if and when the court rules in favor of WD’s injunction against the sell-off. It is forecast that the court will make a ruling in favor of WD. If WD wins the case, it will give rise to the worst case -- disabling Toshiba from taking care of excessive liabilities by the end of March, 2018 and subsequently delisting Toshiba from the Tokyo Stock Exchange.
Real Benefits for SK Hynix Questioned
In the semiconductor industry, "The real negotiation will start now," experts say. Toshiba said in a statement announcing its board of directors meeting, "The agreement guarantees a long-term management right to Toshiba semiconductor by limiting participating foreign companies’ voting rights to Toshiba Memory," in a press release about the resolution of the board of directors. This means that Toshiba will sell off its memory business but Toshiba and the Japanese government will keep its management rights. On the other hand, it is said that the Korea-US-Japan Consortium has a stance that they acknowledge that Japan has management rights, but companies in the consortium should also have significant voting rights."
Toshiba announced that the company will transfer a 100% stake in its semiconductor subsidiary Toshiba Memory to Pan Gea, a special purpose corporation founded by the Korea-US-Japan Alliance. The total volume of the sale reaches 2 trillion yen. Toshiba will acquire management rights by investing 350.5 billion yen in Pan Gea. Japanese companies such as Hoya, a digital optical equipment maker, will participate in equity investment and Japanese banks such as Mitsui Sumitomo will shell out 600 billion yen via a financing method. As for overseas companies, it is known that Bain Capital, SK Hynix will finance about 600 billion yen and 400 billion yen will come from four US IT companies including Apple.
"Japanese companies including Toshiba will secure more than 50% of the voting rights," the Nihon Keizai Shimbun Newspaper of Japan said on September 21. “Four US IT companies including Apple will receive preferred shares without voting rights.” Japanese media report, "SK Hynix's investment is a simple loan, will not translate into convertible bonds (CBs)." Convertible bonds can be converted into stocks after a certain period of time, but a loan only receives interest and does not guarantee equities.
Toshiba also said the company will give the Innovation Network Corporation of Japan (INCJ) and the Development Bank of Japan the right to supervise Toshiba.
"We have a long way to go," an official at SK Hynix said with respect to Toshiba’s announcement of strict and tough sell-out conditions. In other words, it is an internal judgment by SK Hynix that accepting these conditions will not benefit SK Hynix much for investing over three trillion won. "From now on, we will negotiate with Toshiba in earnest and make details of the conditions as advantageous to us as possible," a senior SK group official said. “Not all investment funds will be given as loans as reported by the Japanese media. Unless the deal benefits SK Hynix, the deal may be opposed by SK Hynix’s board of directors. "
It is unclear how much access SK Hynix will have to Toshiba’s fundamental NAND technology. "The Japanese government has been steadily keeping an eye out for the prevention of a semiconductor technology leak to foreign countries," said an analyst at a Korean securities firm. The government's supervision right is likely to keep Toshiba from transferring stakes to foreign companies and forbid them to access to technology.
Threatening Samsung Electronics?
In the meantime, Kwon Oh-hyun, vice chairman of Samsung Electronics, expressed a discomfort about SK Hynix's attempt to acquire Toshiba’s semiconductor business. Samsung Electronics, the world's number-one NAND flash maker, has no choice but to be sensitive to the acquisition of Toshiba Semiconductor by a Korea-US-Japan alliance which includes SK Hynix.
“Ask SK Hynix about that, I have nothing to say,” vice chairman Kwon said when asked by reporters shortly before a meeting with the minister of industry, trade and energy at the Kensington Hotel in Seoul in the morning of September 18.
Apple, the largest customer of Samsung Electronics’ semiconductors and the largest buyer of NAND flash in the world, joined the Korea-US-Japan alliance. In this case, Apple will hold price negotiating power in negotiations with Samsung Electronics with the largest share in the NAND flash market. Samsung Electronics will be forced to have tough negotiations over prices with its customers such as Apple and be faced with a task to keep its position as the number-one company in the NAND flash market.
Apple is deeply troubled by an insufficient supply of NAND flash memories as the company failed to secure a stable supply of them. Finally, Apple placed additional orders with Samsung. Both photos taken with smartphones and downloaded music and videos are stored in NAND flash memories.
As latecomer SK Hynix succeeds in the acquisition of Toshiba Semiconductor as a partner of the alliance, it will be able to rise to No. 2 in the world NAND Flash from 5th place at one go-off. Patent disputes can also be easily avoided by SK Hynix through collaboration with Toshiba Semiconductor, which has the source technology for NAND flash memories. SK Hynix is the world's second-largest DRAM maker, but has not yet stood out in the NAND flash and system semiconductor sectors.