Kioxia Holdings Corp and Western Digital are reportedly stepping up their merger discussions and finalizing a deal structure, as they face increasing pressure to consolidate in the face of a slumping flash memory market. The companies ranked as the world’s No. 2 and No. 4 players respectively, have been impacted by plunging market demand and oversupply. Merging their flash memory businesses could help the companies compete against rivals like Samsung Electronics.
According to Reuters, their sources said the merged entity would be 43% owned by Kioxia, 37% by Western Digital, and the remainder by existing shareholders of both companies. The deal is expected to draw antitrust scrutiny in several countries, including the United States and China. It is also worth noting that no final decision has been made, and the details of the merger are subject to change.
Elliott Management, an activist investor that owns convertible preferred shares in Western Digital, has been pushing for the company to separate its flash-memory business from its hard-drive division since making an initial stock investment last year. One source has suggested that the split would precede the flash memory combination with Kioxia, and that the merged company might pursue a listing after the deal.
Kioxia was sold by Toshiba in 2018 to a consortium led by Bain Capital for $18 billion, and the company has since shelved plans for an IPO due to the deteriorating flash-memory market. Toshiba still owns 40.6% of Kioxia. Elliott is also a shareholder of Toshiba, and one of its executives serves on the board of the Japanese company.
A group led by private equity firm Japan Industrial Partners (JIP) has launched a $15 billion buyout offer for Toshiba, but the company’s board has stopped short of recommending the deal to shareholders, citing concerns that the price was too low. Kioxia’s falling valuation is one of the factors that has dragged down JIP’s offer price, according to a Toshiba filing.
In 2021, Kioxia and Western Digital were in merger talks before negotiations stalled over a series of issues, including valuation discrepancies. The revival of the merger talks was reported in January by Bloomberg. In Japan, the two companies jointly produce NAND flash memory chips, which are used in smartphones, personal computers, and data center servers.
If the merger with Western Digital’s flash memory business proceeds, it is not immediately clear what Toshiba would do with its stake in Kioxia or how the deal would impact JIP’s bid for Toshiba. However, analysts predict that a combined Kioxia-Western Digital would control a third of the global NAND flash market, putting it on par with Samsung, the largest player in the market.
Overall, the merger talks come as Kioxia and Western Digital face a difficult market environment, and consolidation could be a way for the companies to increase their competitiveness. However, the deal’s final details are still uncertain, and regulatory approval could be a significant hurdle.