Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

If the adage, keep your friends close and your enemies closer, ever needed a real-life example, it could be found in Toshiba Corp.'s increasingly fragile relationship with Western Digital Corp.

The cash-strapped Japanese firm has received a low-ball offer from the North American disk-drive maker, which is also its joint venture partner in a flash-memory chip business. But if Toshiba is going to fix its finances and avoid a delisting, it had better come to the realization that a future without Western Digital might be bleak indeed.

In Deep
Toshiba's shares have underperformed since it flagged a writedown of its U.S. nuclear business
Source: Bloomberg

Toshiba is selling its memory-chip unit to raise cash after suffering losses at its Westinghouse nuclear subsidiary. Five groups are in the running: Taiwan's Foxconn Technology Co.; private equity firm KKR & Co. (with the help of Innovation Network Corporation of Japan); Broadcom Ltd., backed by Silver Lake Management LLC; South Korea's SK Hynix Inc. and Bain Capital LP; and Western Digital, which hasn't made a formal bid.

Fresh from its 2016 acquisition of SanDisk Corp., Western Digital may put up 1.5 trillion yen ($13.5 billion) via convertible preference shares, while asking state-backed turnaround fund INCJ and Development Bank of Japan to provide almost 500 billion yen in common equity. According to reports, that 2 trillion yen is much less than what other groups are offering.

But Western Digital has Toshiba over a barrel. It took the Japanese company to the International Chamber of Commerce's International Court of Arbitration, and has refused to allow Toshiba to use its shares as collateral to access a much-needed 700 billion yen credit line. Western Digital has since softened its stance, but the point's been made: There's not going to be a sale unless Western Digital is invited to the party.

Off the Block
Western Digital's share of the NAND chip business would soar if it bought Toshiba's unit
Source: IDC, 2016 NAND market share
Note: Western Digital bought SanDisk last year.

Not that a takeover would be trouble free. Similar to SK Hynix, Western Digital would almost certainly fall foul of antitrust regulators outside Japan. Chief among those likely to block such a deal is China, which, as Mio Kato, an analyst at Uzabase Inc. who publishes on Smartkarma, notes, is trying to develop its own memory-chip technology. "It would be less accommodative to a situation where Toshiba and Western Digital combined would form an effective global duopoly with Samsung," he said.

Western Digital has made its opposition to a Broadcom takeover well known, while despite its reportedly higher offer, Foxconn's prospects aren't the strongest, considering how much effort it took to turn Sharp Corp. around. A perception that Foxconn, a big employer in mainland China, may transfer Toshiba's prized chip technology out of Japan may also work against getting Japanese government support.

That leaves KKR and friends, a group that would appease Japan's national security concerns but leave Western Digital cold. While it's unlikely that Western Digital would ever align itself with Broadcom, Foxconn or SK Hynix, it might just consider taking a minority stake in a KKR-led consortium, which would also keep Toshiba's cash-starved shareholders happy.

Whatever the case, Toshiba should accept that Western Digital isn't going anywhere.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net