- U.S. review cited as Unisplendour calls off $4 billion plan
- Storage maker cuts SanDisk offer in pursuit of cloud market
Western Digital Corp.’s plan to sell a 15 percent stake to a Chinese investor fell apart after the deal came under a U.S. national security review, highlighting the government’s ability to chill agreements that could give Chinese companies access to U.S. technology.
Without the investment from China’s Tsinghua Unisplendour Corp., Western Digital reverted to a lower offer for rival SanDisk Corp.under terms of the original agreement, but is still plugging ahead, showing its determination to gain market access and shave costs in the fast-growing markets for pocket devices and cloud computing.
In separate statements Tuesday, Western Digital and Unisplendour said the Beijing-based company pulled out of its plan to buy a stake in the computer-storage manufacturer after the deal faced an investigation by the Committee on Foreign Investment in the United States. CFIUS, as the panel is known, is led by the Treasury Department and reviews acquisitions of American businesses by foreign investors for security risks.
Western Digital shares fell 7.2 percent to $42.77 at the close in New York. They have fallen 29 percent so far this year.
The scrapped Unisplendour deal highlights the roadblocks Chinese firms are encountering as they seek access to computing know-how. Chinese investors have faced an increasing number of reviews from CFIUS in recent years, and their interest in U.S. technology has drawn fire from lawmakers worried about risks to national security.
Even though Unisplendour wasn’t acquiring a majority stake in Western Digital, CFIUS will investigate even minority share purchases when they carry significant governance rights, according to lawyers who work on CFIUS reviews. The investment would have made Unisplendour Western Digital’s largest shareholder and given it a board seat.
The decision by CFIUS to investigate doesn’t necessarily indicate that the panel, which includes officials from the Defense and State departments, had concerns about the transaction, but did have more questions at least, said Mario Mancuso, a lawyer at Kirkland & Ellis LLP in Washington. CFIUS can impose conditions on deals to protect U.S. security or recommend that the president block a takeover.
"Most Chinese transactions in the United States fly through CFIUS," Mancuso said. "Only some have some difficulty, and in many of those cases those difficulties are addressed through some form of mitigation."
Earlier this month, Fairchild Semiconductor International Inc. decided to go with a takeover proposal from On Semiconductor Corp., passing up a higher offer from a Chinese group on the grounds it might not get a U.S. security nod. In January, Dutch company Royal Philips NV said it was canceling the sale of its lighting-components business to a Chinese-led consortium due to concerns from CFIUS.
Still, if the Unisplendour investment had gone forward, then Western Digital’s planned takeover of SanDisk likely would have undergone a CFIUS review, and future deals by the company probably would have as well, said Anne Salladin, a lawyer at Stroock & Stroock & Lavan LLP in Washington.
"It’s rigorous process," she said. "There’s a lot information that has to be compiled and at the end of the day there is potential mitigation involved, and some companies may not want to go through with that."
Unisplendour didn’t respond to a phone call and e-mail seeking comment on the announcement.
Western Digital said it will buy memory-chip maker SanDisk for $15.8 billion, or $78.50 a share in cash and stock, 16 percent more than its closing price Monday and less than the $86.50 a share offer under earlier terms. The withdrawal of Unisplendour triggered an alternative clause in the original agreement made in October. At the time, Western Digital said it would pay $85.10 a share in cash and 0.0176 of a share, but the deal stipulated that if the Unisplendour transaction was terminated or hadn’t closed, Western Digital would pay $67.50 a share in cash and 0.2387 of a share.
Western Digital’s determination to proceed shows the need for storage suppliers to expand access in computing’s hottest markets while gaining efficiency through size. The deal gives Western Digital a stronghold in the growing market for NAND flash memory chips, which store data in mobile devices and are increasingly being used in computer hard drives.
NAND flash from SanDisk will also let Western Digital supply a growing part of the storage market in the biggest data centers, including in equipment supplied by Dell Inc. and EMC Corp., which are joining in their own mega-merger. Those centers underpin software ranging from corporate applications to apps on consumers’ smartphones, where much of the processing power is delivered via cloud-computing services online.
“The strategic rationale for this acquisition is even more compelling today than when we first announced it in October,” Western Digital Chief Executive Steve Milligan said in the statement. Joining forces with SanDisk could save $500 million in costs within a year and a half, and $1.1 billion by 2020, the Irvine, California-based company said.
While SanDisk’s chips are commodity-like storage semiconductors used in mobile devices and computers and widely available from other suppliers, the U.S. company is one of only a handful that’s developing cutting-edge manufacturing capabilities. China currently doesn’t have direct access to such techniques and companies such as Intel Corp. have been prevented from exporting it there.