Western Digital to spin off unit after Kioxia bid failed

(Oct 30): Western Digital Corp will split into two separate, publicly traded companies after talks to merge with Kioxia Holdings Corp fell apart.

The storage maker will spin off its flash business, which focuses on memory for computers, devices and portable drives, it said in a statement on Monday. The company’s remaining HDD business will focus on selling high-capacity memory to cloud data centres, according to an investor presentation.

Shares surged more than 14% in pre-market trading in New York on the news.

“After fully evaluating a comprehensive range of alternatives, the Western Digital management team and board has determined that spinning off its flash business is the best executable alternative at this time,” said chief executive officer David Goeckeler during an investor call on Monday.

The announcement came alongside the company’s results for the fiscal first quarter. It reported net revenue of US$2.75 billion (RM13.10 billion), a 26% drop from the same period a year prior, though still slightly better than expected by analysts. Its flash business declined 9.6% to US$1.56 billion, while its HDD unit declined 40.7% to US$1.2 billion.

Western Digital and Japanese storage maker Kioxia had talked for years about a possible combination, but discussions were stymied over issues of control, leadership, economics and politics. The deal ultimately fell apart after an indirect shareholder in Kioxia, SK Hynix Inc, said it wouldn’t support a merger.

The company’s shares had slipped about 14% this month following uncertainty around the deal. This “Plan B” option to spin off its flash business “may be the best possible outcome to maximise shareholder value after Kioxia’s failed bid”, said Bloomberg Intelligence’s Woo Jin Ho.

The move is intended to be structured in a tax-free manner and is planned for the second half of 2024, the company said in the statement. That timing “could work in Western Digital’s favour, since both HDD and Flash should be in a recovery”, Ho added.

Activist investor Elliott Investment Management urged Western Digital to make this move in March 2022. In a statement on Monday, the hedge fund said it supports the decision, and “will provide Western Digital with strategic flexibility for future value creation”.