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Why Suitors Are Flocking to Toshiba's Chip Business
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Toshiba has been in trouble since the surfacing of accounting irregularities in its Westinghouse nuclear business that included cost overruns on nuclear construction projects as well as overstatement of profit from the years 2008 through 2014. The company expects to report an annual loss of $9 billion this year due to write-downs related to Westinghouse and has given a warning that it may not be able to continue as a going concern as a result. This ultimately also led to tensions with auditors PriceWaterhouseCoopers.
But not all of this 142-year old electronics conglomerate is mired in losses; one section that is doing rather well is the flash memory chip business, where it has a JV with SanDisk (now Western Digital). So Toshiba needs to sell this business and install proper internal controls, which if unsatisfactory, will lead to its de-listing. Which is why it has put this business on auction.
While the front runners in the bidding process are Broadcom (AVGO - Free Report) and private equity firm Silver Lake Partners, Taiwan’s Foxconn (Honhai Precision Industry), South Korean chipmaker SK Hynix, and Western Digital (WDC - Free Report) itself, some news reports indicate that Softbank, Apple (AAPL - Free Report) , Alphabet (GOOGL - Free Report) and Amazon (AMZN - Free Report) may also be interested.
Of these, Broadcom’s first round offer of 2.5 trillion yen ($23 billion) and Foxconn’s 2 trillion yen are the highest bids. Hynix’s bid is unknown as is Western Digital’s, but WDC has said that analysts estimate the fair value to be around 1.5 trillion yen.
Why the Excitement?
Toshiba is the second largest NAND flash memory maker, a technology that is increasingly taking over mobile devices and finding application in the cloud. The advantage of flash memory is in its speed and reliability, while the regular hard drive storage is cheaper but shorter-lived. As the cost of flash drives falls over time, it will be used more broadly and will replace or at least supplement hard drive storage.
Since most tech players mentioned in the previous section either sell memory or buy it, they would gain leverage from acquiring the technology. Those that sell can augment their current offerings while those that buy will have another way to consolidate their supply chain and thus lower costs while also gaining technological advamtage.
What Could Be the Result
The deal will have a political angle to it, since the Japanese government is unlikely to approve a sale to investors that might bring risk to national security. Because of its links to China, a sale to Foxconn will likely not be approved by the government, even if Japanese banks agree to partner with it to finance the deal. So Hynix is better placed to win.
On the other hand, the government will be quicker to approve the deal if the unit stays between Japanese and American owners. Since Western Digital has issues with Broadcom, and it will most likely have a say (given its $13 billion investment in the JV over several years and current agreement with Toshiba), Broadcom may not be able to bid successfully in this case. But Western Digital won’t be able to buy out the unit unless it gets itself some partners (the company may not be able to dish out more cash so soon after SanDisk).
That leaves combinations of American and Japanese players, which may include Apple and Softbank. Apple will prefer that Foxconn gets a stake because it is its major supplier. So Toshiba may successfully sell a portion of the business to the Apple-Foxconn combination or Apple-Softbank-Foxconn combination or a combination that includes Softbank and other players.
The Best & Worst of Zacks
Today you are invited to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buys" free of charge. From 1988 through 2015 this list has averaged a stellar gain of +25% per year. Plus, you may download 220 Zacks Rank #5 "Strong Sells." Even though this list holds many stocks that seem to be solid, it has historically performed 6X worse than the market.
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Why Suitors Are Flocking to Toshiba's Chip Business
Toshiba has been in trouble since the surfacing of accounting irregularities in its Westinghouse nuclear business that included cost overruns on nuclear construction projects as well as overstatement of profit from the years 2008 through 2014. The company expects to report an annual loss of $9 billion this year due to write-downs related to Westinghouse and has given a warning that it may not be able to continue as a going concern as a result. This ultimately also led to tensions with auditors PriceWaterhouseCoopers.
But not all of this 142-year old electronics conglomerate is mired in losses; one section that is doing rather well is the flash memory chip business, where it has a JV with SanDisk (now Western Digital). So Toshiba needs to sell this business and install proper internal controls, which if unsatisfactory, will lead to its de-listing. Which is why it has put this business on auction.
While the front runners in the bidding process are Broadcom (AVGO - Free Report) and private equity firm Silver Lake Partners, Taiwan’s Foxconn (Honhai Precision Industry), South Korean chipmaker SK Hynix, and Western Digital (WDC - Free Report) itself, some news reports indicate that Softbank, Apple (AAPL - Free Report) , Alphabet (GOOGL - Free Report) and Amazon (AMZN - Free Report) may also be interested.
Of these, Broadcom’s first round offer of 2.5 trillion yen ($23 billion) and Foxconn’s 2 trillion yen are the highest bids. Hynix’s bid is unknown as is Western Digital’s, but WDC has said that analysts estimate the fair value to be around 1.5 trillion yen.
Why the Excitement?
Toshiba is the second largest NAND flash memory maker, a technology that is increasingly taking over mobile devices and finding application in the cloud. The advantage of flash memory is in its speed and reliability, while the regular hard drive storage is cheaper but shorter-lived. As the cost of flash drives falls over time, it will be used more broadly and will replace or at least supplement hard drive storage.
Since most tech players mentioned in the previous section either sell memory or buy it, they would gain leverage from acquiring the technology. Those that sell can augment their current offerings while those that buy will have another way to consolidate their supply chain and thus lower costs while also gaining technological advamtage.
What Could Be the Result
The deal will have a political angle to it, since the Japanese government is unlikely to approve a sale to investors that might bring risk to national security. Because of its links to China, a sale to Foxconn will likely not be approved by the government, even if Japanese banks agree to partner with it to finance the deal. So Hynix is better placed to win.
On the other hand, the government will be quicker to approve the deal if the unit stays between Japanese and American owners. Since Western Digital has issues with Broadcom, and it will most likely have a say (given its $13 billion investment in the JV over several years and current agreement with Toshiba), Broadcom may not be able to bid successfully in this case. But Western Digital won’t be able to buy out the unit unless it gets itself some partners (the company may not be able to dish out more cash so soon after SanDisk).
That leaves combinations of American and Japanese players, which may include Apple and Softbank. Apple will prefer that Foxconn gets a stake because it is its major supplier. So Toshiba may successfully sell a portion of the business to the Apple-Foxconn combination or Apple-Softbank-Foxconn combination or a combination that includes Softbank and other players.
The Best & Worst of Zacks
Today you are invited to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buys" free of charge. From 1988 through 2015 this list has averaged a stellar gain of +25% per year. Plus, you may download 220 Zacks Rank #5 "Strong Sells." Even though this list holds many stocks that seem to be solid, it has historically performed 6X worse than the market.
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