On Wednesday, Western Digital (NASDAQ:WDC), the well-known hard disk drive manufacturer, is reportedly contemplating a significant business restructuring under mounting pressure to divide its operations into two discrete entities. The proposed division would separate the company's traditional hard disk drives from its flash-based memory products, a sector it entered in 2016 following the $19 billion acquisition of SanDisk.
The call for this split primarily came from Elliott Investment Management, an activist investment firm. In May 2022, Elliott sent a letter to Western Digital highlighting the company's operational, financial, and strategic underperformance due to managing two vastly different businesses within the same organization.
Responding to Elliott's suggestions later that month, Western Digital's CEO David Goeckler acknowledged that the firm was exploring various strategic and financial alternatives to optimize its value, including a potential split. This announcement led to a rally in Western Digital's shares.
In parallel with these developments, reports surfaced indicating that Western Digital was in merger discussions with Kioxia Holdings, its joint venture partner in flash memory production. Japan-based Kioxia is now reportedly negotiating with Japanese banks to refinance $14 billion in loans ahead of a possible merger with Western Digital's flash business.
According to these reports, the merged entity would be 50.5% owned by Western Digital and 49.5% by Kioxia's current owners. It should be noted that Bain Capital owns 56.24% of Kioxia while Toshiba (OTC:TOSYY) has a 40.64% stake. The proposed merger would exclude Western Digital's hard-drive business.
Analysts have been closely monitoring these developments. Jordan Klein from Mizuho trading desk views Western Digital's shares as among the best long-term investments in the semiconductor sector due to recent capacity cutbacks in the NAND flash memory business seemingly pushing up spot market prices. Klein also highlighted increased production plans by Chinese smartphone manufacturers in response to strong sales.
BNP Paribas (OTC:BNPQY)' Karl Ackerman has upgraded his rating on Western Digital shares from Neutral to Outperform, setting a price target of $58. Ackerman anticipates demand for both NAND flash memory and "nearline" hard drives - used for data that isn't immediately needed but is more readily available than off-site storage - to bottom out. Consequently, he expects Western Digital's stock to gradually rise as the strategic review concludes in the upcoming months.
As of Wednesday, Western Digital shares were trading 4.5% higher at $45.90 in the afternoon trading.
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