Beauty is in the Eye of the Beholder: SanDisk and Its Attraction to Western Digital & Micron
After seeing the headline on Bloomberg News that Micron Technology Inc. (MU) and Western Digital Corp. (WDC) are in talks with SanDisk Corp. (SNDK) about a possible acquisition, I decided to seek out insights and perspectives on this possible deal from our leading memory and storage analysts at IHS Technology. Michael Yang, Dee Robinson, Mike Howard, Cliff Leimbach and Fang Zhang bring many years of experience in their comprehensive research and coverage of the memory and storage industries. Below are some of the compelling insights that they shared with me:
- The Hard Disk Drive (HDD) companies, Seagate and Western Digital, have been slow to pursue opportunities related to Solid State Drives (SSD). They refused to get onboard with the developing trend toward SSDs a few years ago when the market was emerging and created an opening for suppliers of NAND flash players to enter the market directly. As a result, other players have established themselves as the leading suppliers of SSDs ahead of the traditional leaders in storage technologies. IHS projects that in 2015 Samsung and Intel will finish with $5.5 billion and $2 billion in revenue respectively.
- SanDisk has been struggling in the SSD market, particularly the enterprise segment, this past year. Their acquisition of Fusion IO was a dud, and they have not been able to keep up with the enterprise market moving to lower cost SATA solutions. They've fallen from third to fourth place this year in the enterprise SSD market share race (WDC went up from fourth to third.) Combining these two companies might enable them to compete better with the likes of Samsung and Intel for the enterprise business, as they would have the scale, the flash memory and WDC's history as a storage vendor.
- The flash memory IC business is a much more brutally competitive arena than the hard drive/storage business. Samsung is an aggressive competitor and they've been able to gobble up market share in the SSD market by capitalizing on their leading technology (3D NAND) and pricing initiatives. The flash memory segment also requires significantly higher capital investment, particularly as the industry moves to 3D manufacturing. A storage company, such as WDC, would have a steep learning curve trying to compete in the flash memory market. Storage companies may have little choice but to enter this market for access to flash memory supply because flash memory-based SSD is gaining share at the expense of traditional hard drives. WDC has made some flash related acquisitions in the past (Virident & Stec), but they were smaller scale SSD vendors.
- The pressure to be a competitive supplier of SSDs continues to grow. Penetration of SSDs is now reaching nearly 30% of all PCs sold. Dell's corporate PCs will see 60%+ shipped with SSDs in 2016, and of course, Apple is nearing 100% adoption in its computers. The Microsoft Surface will be 100% SSD for its storage ability. The SSD market is expected to pass $13 billion in revenues in 2015 and will pass HDD revenues by 2019 with $20.8 billion vs $19.6 billion.
- SanDisk also has a significant business in mobile electronics. However, they have also lost out in this market as eMCPs become more popular because SanDisk does not have DRAM in its portfolio. Being sold to Micron would close this gap in their portfolio, while Micron could gain additional production capacity from a joint venture. However, realizing this benefit would be a very complicated proposition because Toshiba actually owns the fabs in their joint venture with SanDisk.
- One very interesting aspect of a potential deal between WDC and SanDisk is the interest of China in expanding its semiconductor industry presence and capabilities. Many of the semiconductor companies that present the best acquisition prospects for China are based in the U.S. As a result, China faces tall barriers to a direct acquisition due to U.S. laws and regulations that would likely scuttle any acquisition involving a company that is considered to have sensitive technology. This could apply to almost any advanced semiconductor company, including memory IC suppliers. WDC just received an injection of $3.8 billion from one of China Tsinghua's subsidiaries for 15% stake in the company. This puts WDC in strong position financially to make an acquisition of SanDisk. A SanDisk acquisition by WDC could help China achieve its ambition to expand its semiconductor business, although in an indirect fashion that would skirt regulatory issues. On the flip side, the investment by China Tsinghua in WDC may help WDC with regulatory issues in China related to its Hitachi GST deal. Bottom line - SanDisk may really be China's end goal in buying into WDC.
- Given that Micron already has NAND flash business it would appear that they are less incentivized to pursue an acquisition of SanDisk compared to WDC. They simply would not achieve the same level of benefits as can be found in a WDC / SanDisk deal. All things considered the most likely scenario is an acquisition of SanDisk by WDC. As a reminder, the fact that talks are taking place does not mean that any deal will emerge. However, our analysis shows multiple significant benefits for all parties in a WDC / SanDisk deal.
Check out the highly valuable research and analysis delivered by this team of memory and storage analysts at the following link: IHS Memory IC Research.
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