Western Digital Stockholders Are Getting Raw Deal in SanDisk Acquisition
Flash memory devices manufacturer and seller SanDisk Corp. (NASDAQ:SNDK) is continuing its rally after confirmation of rumors that Western Digital Corporation (NYSE:WDC) will be buying the company. It’s been confirmed that Western Digital will be acquiring SanDisk for $19.0 billion, way above what was being expected. Western Digital has decided to offer $86.50 for each share of SNDK stock, with $85.10 of the price in cash and the rest in 0.0176 of WDC stock.
Now, I have been supportive of a WDC-SNDK-merger, albeit a little skeptically. However, Western Digital went a little too far in its acquisition offer.
The Upside to the SanDisk Acquisition
In order to better understand why Western Digital has a hidden synergistic value in this acquisition, we have to look at its core products versus SanDisk’s.
Western Digital specializes in hard disk drives which are slowly going obsolete. The impending redundancy of its core product is bound to cause a major dent in its future revenue stream. The only way to avoid the inevitable is to introduce new product lines, either from scratch or from acquisitions.
Now, the flash arrays technology has predominantly taken over the data storage industry. Flash memory devices have a strong and growing share in the consumer household market with solid demand in mobiles and video cameras. Their demand by high-end enterprise businesses is also on the rise with businesses streamlining their storage costs and switching from hard drives to flash and cloud storage.
Western Digital boasts a sound portfolio for cloud storage but greatly lacks in the flash arena. On the contrary, SanDisk generates one third of its revenue from its flash-based solid state drives (SSDs) and plans to roll out the fast-performance 3D-NAND flash devices by next year. If acquired, these will also get added to Western Digital’s product portfolio.
By consolidating their product lines, the two businesses will be able to unlock some synergies. Luckily, Western Digital has reasonable cash reserves at its disposal to support the acquisition.
The glaring downside to SanDisk’s acquisition is the overpriced acquisition offer. SanDisk was looking for an acquisition price between $80.00 and $90.00 per share in a cash offer. WDC could have easily settled with a figure on the lower end of the range. With an attractive five percent premium to SNDK’s Tuesday’s close price of $75.51 for outstanding stock of 204.4 million, the total acquisition price would have stood at roughly $16.2 billion, much below the $19.0 billion being offered.
Another reason to be concerned is SanDisk’s sliding revenue in the last two years, with its core flash products showing deteriorating sales. Rising competition left and right has been one reason why SanDisk has been looking for acquirers to consolidate its business.
The Bottom Line for WDC Stock
SanDisk’s cash reserves are five times lower than Western Digital’s. But, if acquired, it will double Western Digital’s debt burden on its balance sheet. I see the acquisition offer to be greatly overpriced against the $500 million of annual synergies that WDC expects to generate in the first year of acquisition. The synergies are most likely to be achieved by layoffs and capital expenditure cuts and less likely by SanDisk’s business.
The SanDisk-WDC merger, however, would mean great troubles for Micron Technology, Inc. (NYSE:MU), which competes with SanDisk in the flash devices arena.
I’m definitely bearish on this deal.