Western Electronic (NASDAQ:WDC) a short while ago agreed to get SanDisk (Unknown:SNDK.DL) for $19 billion, or $86.fifty for every share. WD controlled 43% of the industry for traditional tricky disk drives (HDDs) last 12 months. On the other hand, WD only has a small industry share in sound-point out drives (SSDs), which are smaller, quicker, and never have injury-prone going parts. Despite their increased price, SSDs have displaced HDDs in increased-conclusion tablets and PCs above the earlier handful of years.
Which is why WD acquired SanDisk, which controls 11% of the SSD industry. Blended with Hitachi‘s tricky generate device, which it obtained 3 years in the past, WD will control virtually fourteen% of the SSD industry. That tends to make it the second premier SSD company in the globe just after Samsung (NASDAQOTH:SSNLF), which controls virtually 45% of the industry. When the logic behind the offer is sound, some WD traders might be wondering if the organization overpaid.
The crucial quantities
Western Digital’s proposed $86.fifty buy price tag will consist of $85.ten in income and the rest in stock. But if a prepared 15% financial investment in WD by Tsinghua Unigroup subsidiary Unisplendour goes via, the income part of the offer will fall to $sixty seven.fifty for every share.
Western Electronic finished last quarter with just $5.three billion in income and $2.six billion in financial debt. To finance the offer, WD options to get on $18.four billion in new financial debt. It will also suspend its buyback software, which was used to purchase back again $758 million in shares above the earlier 12 months. On the other hand, WD will keep having to pay dividends, which took $396 million out of its cost-free income movement of $1.six billion above the earlier 12 months.
Western Electronic expects price synergies to access a $500 million for every 12 months operate charge in just 18 months. The organization expects the offer to become earnings accretive in just 12 months just after closing.
Do two losers make a winner?
By buying SanDisk’s portfolio of NAND chips, controllers, and SSDs, WD has enormously decreased the menace of SSDs disrupting its main HDD company. But SanDisk also struggled above the earlier 12 months due to lower rates, products delays, and a reduction of best buyers like Apple and Samsung. Apple formerly accounted for virtually a fifth of SanDisk’s company, in accordance to Bloomberg estimates.
As a end result, analysts count on SanDisk’s revenue to tumble seventeen% on a yearly basis this 12 months, to $5.5 billion, and earnings for every share to plunge 43%. By comparison, Western Electronic is expected to put up a seven.four% decline in profits to $thirteen.5 billion with an earnings fall of thirteen%.
Buying SanDisk offers WD a powerful presence in SSDs and flash memory, but it also inherits the company’s difficulties. Samsung could keep thieving company away, whilst a projected NAND oversupply could keep driving down rates. Previously this 12 months, SanDisk admitted rates had been declining quicker than expenses, and that it remained behind the technological curve in next-gen 3D NAND know-how. When SanDisk’s SSD profits rose 60% on a yearly basis to $1.nine billion last 12 months, or 29% of its revenue, profits of embedded and removable storage both of those declined.
Did Western Electronic pay far too considerably?
WD’s give of $86.fifty for every share values SanDisk at virtually 35 situations trailing earnings, as opposed to the marketplace common P/E of 15 for the info storage marketplace. As a result, traders might be wondering why WD did not wait for SanDisk’s price tag to fall further more.
There are 3 explanations for WD’s timing. Initially, it preferred to get on $18.four billion in financial debt when curiosity charges had been small. A opportunity hike afterwards this 12 months could price WD hundreds of tens of millions in additional curiosity payments. Second, SanDisk shares have been rebounding since September, many thanks to many analyst upgrades that championed SanDisk’s growth opportunity in the organization SSD industry. And finally, SanDisk’s $1.1 billion acquisition of Fusion-io just started to become earnings accretive. If Western Electronic waited longer, it could conclusion up having to pay increased curiosity charges on an even increased overall price tag tag.
How this suits into every little thing else
By merging its production operations with SanDisk, WD can get benefit of economies of scale and manufacture additional SSDs and memory chips at lower rates. This would support it contend additional correctly versus Samsung. This strategy also complements WD’s acquisition of Hitachi GST, which boosted its HDD industry share versus marketplace rival Seagate (NASDAQ:STX).
It might get a whilst for Western Electronic to completely combine SanDisk’s company, but just after that integration concludes, Seagate could be in difficulties. Seagate acquired Samsung’s HDD device four years in the past to counter WD’s buy of HGST, but its only protection versus WD’s acquisition of SanDisk is a multi-12 months NAND supply alliance with Micron.
The crucial takeaway
WD necessary to purchase SanDisk to improve its guide above Seagate and make improvements to the equilibrium amongst SSDs and HDDs in its portfolio. The price tag tag might appear to be superior, but contemplating the favorable curiosity charge natural environment and SanDisk’s opportunity rebound, I believe Western Electronic made the proper go.