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Western Digital Cuts SanDisk Offer After China Yanks Funds

China’s Tsinghua Holdings pulled its $3.8 billion investment in Western Digital ( WDC ) early Tuesday amid a government inquiry, prompting the disk drive maker to slash its already threatened bid for flash memory maker SanDisk ( SNDK ). The SanDisk acquisition will have to hurdle a Western Digital shareholder vote, which would not have been required with the investment by Tsinghua subsidiary Unisplendour. Western Digital stock was down 7% in midday trading on the stock market today , near 43, while SanDisk stock was down 2%, near 66. Shares of both have fallen 37% and 10%, respectively, since the deal was announced Oct. 21. Western Digital Investor Opposes Bid On Monday, Western Digital investor Alken Asset Management wrote an open letter claiming the $19 billion offer for SanDisk was “simply too high.” SanDisk, an Apple ( AAPL ) supplier, faces competitive headwinds in 2016. Alken owns about 2% of Western Digital stock. The vote is slated for March 15. The Unisplendour investment would have given it a 15% stake in Western Digital. Unisplendour terminated its Western Digital investment after the Committee on Foreign Investment in the U.S. said it would investigate. Neither Western Digital nor Unisplendour will pay a termination fee. In December, Summit Research analyst Srini Sundararajan told IBD that Tsinghua Holdings was trying to get its hands on SanDisk technology. Chip-arm Tsinghua Unigroup plans to invest $47 billion in semiconductor technology to become the world’s No. 3 chipmaker, leapfrogging  Qualcomm ( QCOM ). It wouldn’t be the first time a Tsinghua Holdings bid for U.S. technology was shuttered on regulatory concerns. A rumored $23 billion bid for Micron Technologies ( MU ) by Tsinghua Unigroup seemingly fell flat last year on worries that CFIUS would stop the deal. SanDisk Acquisition Remains ‘Compelling’ By terminating its Western Digital investment, Unisplendour triggered an alternative deal between Western Digital and SanDisk. Western Digital will now pay $67.50 per share in cash and 0.2387 in stock for SanDisk, for a value near $78.50 per share at Western Digital’s Monday closing price. The original deal valued SanDisk at 86.50 a share. Despite the failed Unisplendour bid, the demand for data storage is rising, Western Digital CEO Steve Milligan said Tuesday in a statement. By acquiring SanDisk, Western Digital would get easy access to Nand (flash memory). “We believe the strategic rationale of this acquisition is even more compelling today than when we first announced it in October last year, given industry trends and strong execution by both companies,” Milligan said in the statement. The SanDisk deal has been expected to close in Q2. Western Digital said it continues to see $500 million in synergies within 19 months of the closure and $1.1 billion by 2020. If the deal fails, Western Digital must pay SanDisk $184 million. Toshiba Could Benefit Western Digital RBC analyst Amit Daryanani sees the Western Digital-SanDisk deal being 34% dilutive without the Unisplendour investment. The ongoing shift to 3D Nand has pressured average sales prices for SanDisk’s bread-and-butter Nand business, he wrote in a research report. “While we think the long-term rationale of owning HDD (hard disk drive) and Nand under one umbrella is logical, the near-term implications of this could be negative,” he wrote. Needham analyst Richard Kugele notes the $17 billion debt that Western Digital will incur if it acquires SanDisk. But a partnership with Toshiba via SanDisk could buoy Western Digital. Toshiba manufactures SanDisk’s Nand. “Nothing will change the aggressive nature of the Nand industry, but partially owning a fab through the Toshiba partnership should help Western Digital over time navigate those waters,” Kugele wrote in a research report. Daryanani rates Western Digital stock outperform and has a 68 price target. Kugele rates Western Digital stock a strong buy and has a 90 price target.

‘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.