Western Digital Earnings Show Value and Risk of SanDisk Purchase

Western Digital’s earnings showed the value of its SanDisk acquisition and how much it has to lose if a partnership with Toshiba is disrupted by the desperation sale of the Japanese company’s chip unit, according to Bloomberg.

The company has posted results that topped estimates every quarter since completing the $15.8 billion purchase of the memory chipmaker last May and its stock has jumped 31 percent this year. Contrast that with the single-day 17 percent drop in shares of rival Seagate after it reported earnings that still mostly depend on older, less desirable spinning magnetic-disk-based hard drives.

The company reported a 65 percent increase in sales in the first quarter on surging demand for flash memory, a more modern type of storage technology for phones and computers that came with the SanDisk deal. But the SanDisk business has a joint venture with Toshiba’s chip division, which is for sale as the Japanese company seeks to cover losses from its failed attempt to expand into the nuclear power industry.

Western Digital has held discussions with Innovation Network of Japan and Development Bank of Japan about options for a bid. It’s pursuing exclusive talks with Toshiba and has argued that a sale to a third party is in breach of their joint-venture agreement, a claim that his Japanese partners refute.

The company’s legal rights and the Japanese government’s desire to stop control of the crucial technology passing to another country will help achieve a positive result for his company, said Mark Long, Western Digital’s CFO. The enemy of a good conclusion to the sale process is time.

Western Digital now faces the uncertainty of who might take Toshiba’s majority stake in their joint venture, whether they’ll continue to invest at the required levels, and even if the new owner will compete against it. Buying Toshiba’s unit at the prices being proposed would put a heavy burden on Western Digital’s finances. The company said last week it had cash and cash equivalents of $5.8 billion and “liquidity available“ totaling $6.8 billion.