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An Oasis of Sanity in a Frothy M&A Market

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
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As the M&A market keeps trucking along at a record pace, there's always a risk that overheated dealmaking leads to frothy valuations and disappointing outcomes. Here's one possible mega-deal investors need not worry about: Western Digital and SanDisk.

An agreement to combine the two data-storage companies could come this week, and Western Digital is discussing an offer between $80 and $90 a share, or at least $16 billion excluding debt, Bloomberg’s Alex Sherman reported Monday. That’s at least 35 percent higher than SanDisk’s average stock price for the past 20 trading sessions.

The deal would stand out in a year when some questionable transactions are getting done at valuations that are tough to justify and often dependent on ``synergy'' estimates that may or may not be feasible.

In this case, both companies have pristine balance sheets. And Western Digital just received a $3.8 billion investment from China’s Tsinghua University to aid its merger appetite as the entire industry engages in an acquisition spree that’s already reached nearly $80 billion this year.

Western Digital probably won’t need to use its stock to fund the purchase. So assuming it's an all-cash deal at the high end of $90 a share, the transaction would be immediately accretive, increasing earnings by more than 40 percent in 2016, according to data compiled by Bloomberg -- and that's without accounting for any cost savings. That's a big boost: Before news of the possible merger, analysts were projecting that Western Digital’s earnings would climb just 1 percent in its fiscal year ending in June and 12 percent in the following 12 months.

The deal would be a relative bargain, too. A $90-a-share offer would put SanDisk’s takeover valuation at about 12 times its Ebitda from the past four quarters. That’s the lowest multiple among semiconductor acquisitions in the past year worth at least $1 billion. 

The bottom line: If Western Digital and SanDisk can win regulatory approval -- which is an "if" because of the Chinese interests -- then this could be one of the best deals of 2015.

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

To contact the author of this story:
Tara Lachapelle at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net