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‘Melting Franchise’ SanDisk Bad For Western Digital: Investor

Western Digital ( WDC ) investor Alken Asset Management is pushing the disk drive maker to send Apple ( AAPL ) supplier SanDisk ( SNDK ) back to the sales block, and Western Digital and SanDisk shares split the difference today on Wall Street. Western Digital stock bounded 4.5% on the stock market today , while SanDisk stock slumped 1.7%. The companies’ shares have plunged 34% and 10%, respectively, since the $19 billion deal was announced Oct. 21. At the time, the transaction was at a 70% premium to SanDisk’s stock price, Alken analyst Vincent Rech wrote in an open letter to Western Digital shareholders. “The price being paid for SanDisk is excessive in light of the changing landscape for SanDisk’s products and capital markets considerations,” he wrote, noting that Western Digital would be forced to take on $14 billion in debt to fulfill the deal. “SanDisk, specifically, has suffered significant business challenges recently, causing us to worry as well about paying top dollar for a melting franchise,” he added. Since the deal was announced, competition in the Nand (flash memory) field has expanded, squeezing demand, he wrote. Now, a key element of SanDisk’s sales is under attack. Hours before Western Digital and SanDisk announced their merger, Intel ( INTC ) unveiled its $5.5 billion plan to convert its Dalian, China, facility to ramp non-volatile memory. Intel and Micron Technologies ( MU ) jointly developed 3D Nand and 3D XPoint in 2015. And Tsinghua Unigroup’s entrance into the chip industry will only stoke more competitive fires, Rech wrote. The Chinese conglomerate plans to invest $47 billion to become the world’s No. 3 chipmaker. To that end, Tsinghua invested $3.8 billion in Western Digital in the month following the SanDisk acquisition plan. Further, SanDisk is dependent on Toshiba for Nand manufacturing. Earlier this month, Toshiba reported its biggest annual loss. And earnings forecasts for SanDisk — as well as its Nand-rivals Micron, Toshiba, Samsung and SK Hynix — have dropped 30% since the deal was announced. “The market now expects the Nand market to be more competitive — and profit more elusive — than the time the transaction was originally negotiated,” he wrote. In 2015, SanDisk reported $616 million in operating income — the lowest level since 2009 — and well below the $1.5 billion in four of five years that ended Dec. 31, 2014, Rech wrote. Last year, SanDisk suffered from major revenue losses from top customer Apple. Acquiring SanDisk gives Western Digital quick access to the Nand chips needed for its solid-state-drive business, Rech wrote. But that only comprised 7% of Western Digital’s total sales in 2015. Alken plans to vote on March 15 against the merger. Should the deal fail, Western Digital would be required to pay SanDisk $185 million.

Micron Snubs Tsinghua, Favors Another Chinese Partnership: Analyst

Micron Technologies ( MU ) rebuffed Tsinghua Unigroup’s $23 billion bid, but that doesn’t mean the memory chipmaker has scrapped plans for Chinese partnership, MKM analyst Ian Ing wrote Tuesday in a research report. That partnership could come in the form of a joint venture, Ing wrote in a research report after Micron’s analyst day on Friday. Ing reiterated a buy rating and 19 price target on Micron stock, which was up 7.3% in afternoon trading in the stock market today , near 10.80. “We think Micron would require control of both IP and production decisions in the structure of any JV,” he wrote. “The biggest benefit to Micron is the ability to produce output as a ‘local supplier’ and national champion for China’s domestic market.” Chinese Investment In Micron China plans to invest $55 billion in local chipmaking businesses by 2020 in an effort to curb reliance on foreign semiconductors. But state-sponsored Tsinghua Unigroup’s bid for Micron was doomed from the start, analysts say, as U.S. regulators would have shut it down. A joint venture, however, wouldn’t necessarily spike regulators’ concerns. Credit Suisse analyst John Pitzer said he “would not be surprised by an equity investment in Micron from one of the Chinese private equity companies.” After its failed Micron bid last year, Tsinghua Unigroup invested $3.8 billion in Western Digital ( WDC ), days before Western Digital announced its plan to acquire flash memory chip maker SanDisk ( SNDK ). “(Micron) has a presence in all major memory markets, which makes it particularly interesting from M&A or an equity investment target for China Inc.,” Pitzer wrote in a report. “While (the Committee on Foreign Investment in the United States) could be an issue for outright sale, the company could still attract equity investment in China.” Pitzer reiterated his outperform rating and 20 price target on Micron stock. Summit Research analyst Srini Sundararajan rates Micron stock a buy, with a 21 price target. Micron Pulling Ahead In Samsung Rivalry “The backdrop of any buy thesis on Micron over the medium term should be that Samsung is not doing well,” Sundararajan wrote in a research report. Apple ( AAPL ) and Chinese LCD manufacturers are scooping share, and Samsung has yet to squeeze much profit out of its nascent 3D Nand flash chips, he wrote. DRAM (dynamic random-access memory) profitability could be Samsung’s “salvation,” but its capital expenditures cut has yet to bear fruit. DRAMs are the most common memory chips in computers. Meanwhile, Micron is slimming costs, Sundararajan wrote. In 20-nanometer DRAM, Micron is targeting a cost reduction CAGR (compound annual growth rate) of 15%-25% through fiscal 2017, Pitzer wrote. Micron also sees 25% cost reduction CAGR in 3D Nand. “Any progress in closing the cost ‘gap’ will drive stock performance,” Pitzer wrote. A rebound could pull Micron stock out of its trough, Mizuho analyst Vijay Rakesh wrote in a report as he upgraded Micron stock to buy from neutral. Sundararajan also expects Micron to let Intel ( INTC ) work out the kinks in the jointly-owned 3D X-Point chip and then “exploit it advantageously” from 2018. “Good times will come should Micron execute,” he wrote. “Micron has dashed hopes and portfolios in 2015, hence it is important to ignore those getting out of Micron stock and take a fresh look.” Even with Tuesday’s gain, Micron stock is roughly 70% off a nearly 16-year high touched in January 2015.

Could Micron Swipe Western Digital’s SanDisk Deal?

SanDisk (SNDK) is not “the pristine, irresistible asset it seemed several quarters ago,” according to Summit Research. But at least two analysts see additional bidders possibly attempting to one-up Western Digital (WDC)’s $19 billion offer for the flash memory chipmaker. There’s a “50-50 chance” Micron Technology (MU), Seagate Technology (STX), Samsung or SK Hynix could attempt to acquire SanDisk, Summit Research analyst Srini Sundararajan wrote