China's Tsinghua Buys Western Digital Stake for $3.8 Billion

  • Tsinghua unit's purchase marks Beijing's pursuit of technology
  • Chinese firm would have 15 percent stake in hard-drive maker

Tsinghua University’s agreement to invest $3.8 billion in Western Digital Corp. would be China’s biggest technology share purchase in the U.S. while adding substantially to the hard-drive maker’s ability to fund deals.

The transaction marks the latest in a wave of acquisitions abroad by Chinese companies -- part of President Xi Jinping’s efforts to elevate their global influence. If the purchase goes through, a unit of government-controlled Tsinghua would become Western Digital’s biggest shareholder. Synaptics Inc., a maker of touch-screen technology, recently rejected an offer from a state-backed Chinese investment group, people with knowledge of the matter said.

“We think the cash infusion bolsters WDC’s already strong balance sheet,” Amit Daryanani, an analyst at RBC Capital Markets, said in a note to clients Wednesday. Expansion in storage systems and flash memory, which is faster than traditional hard drives, have been focuses for Western Digital, he wrote. “We could see the company take a bigger step in both these directions from an M&A perspective.”

Sandisk Corp. is a possible acquisition target, according to analysts at Jefferies Group LLC. Western Digital would still likely need to include equity or raise debt to make such a deal work, the analysts said.

Hewlett-Packard Deal

Western Digital said in a statement that it would use cash from the deal to strengthen its balance sheet and pursue growth initiatives. The Irvine, California-based company had about $5.3 billion in cash at the end of its most-recent quarter, according to data compiled by Bloomberg.

The deal also could help wrap up a merger with Hitachi Ltd.’s hard-drive unit by strengthening Western Digital’s ties with the Chinese government, according to Anand Srinivasan, an analyst at Bloomberg Intelligence. Western Digital bought the Hitachi unit in 2012 but has had to keep the entities distinct while it awaited approval from China’s Commerce Ministry.

Wednesday’s announcement came a week after Xi’s state visit to the U.S. where he met with the country’s technology leaders, including Apple Inc. Chief Executive Officer Tim Cook and Amazon.com Inc. founder Jeff Bezos. Xi has urged his country’s state and private companies to develop local capabilities to reduce reliance on foreign technology.

Tsinghua Unisplendour Corp. agreed to purchase a 15 percent stake in the U.S. company by buying newly issued shares at $92.50 apiece, 33 percent higher than their closing price on Tuesday. The stock rose 15 percent to $79.44 at the close Wednesday in New York, marking the biggest gain in three years.

The deal is Unisplendour’s biggest acquisition this year, after agreeing in May to pay $2.3 billion for a controlling stake in Hewlett-Packard Co.’s local server venture. Tsinghua, one of China’s most prestigious universities, had also been interested in buying U.S. memory-chip maker Micron Corp. through its Tsinghua Unigroup arm, people familiar with the matter have said.

Board Representative

Unisplendour, which last year accepted a $1.5 billion investment from Intel Corp., will have a representative on Western Digital’s board. The person will be restricted from participating in talks involving government contracts, sales or other sensitive matters, Western Digital said in the statement. The Chinese won’t control, own or manage Western Digital’s intellectual property, according to the statement.

Because Unisplendour is taking only a minority stake, the deal is not expected to face review by the Committee on Foreign Investment in the U.S., Western Digital said. The company said it would notify the committee "out of an abundance of caution" and expects to complete the deal by the end of the first quarter.

Unisplendour’s shares in Western Digital would be subject to a five-year lockup. The right to a board seat would be terminated if its shareholding falls below 10 percent.