The Grand Plan .............................
(A corporate fiction)
Main objectives :
1 - Consolidate the semiconductor sector byreducing the number of viable antities.
For Kioxia, WDC and Micron it means either amerger (most probably between Micron and WDC) or the merger of industrialassets where one or more foundries might be owned by two or more semiconductorcompanies wich would allow mass production and reduced cost (shared foundriesby Kioxia and WDC becoming a form of consolidation model)
2 - Pave the way for a large adoption of newmemory technologies through shared production costs and risks.
General strategical scheme
Mainhurdles and solutions in the consolidation process :
Anti-competitiveregulations
- The planmust provide a solution to avoid any form of anticompetitiv mergers that wouldbe opposed by regulatory bodies in US, China and Europe.
A merger betweenMicron Kioxia or WDC will create an entity with a market share close to Samsung’sone. With the ongoing US China Trade war, that could be enough for chinaregulators (and others) to block the deal. In this context a betterconsolidation strategy could be not to merge companies but to share one or morefoundries to reduce costs and risks.
[AppliedMaterials announced earlier this week that it terminated a plan to acquireKokusai Electric Corp as it could not get regulatory approval in a timelyfashion.]
https://www.taipeitimes.com/News/biz/archives/2021/04/03/2003754985
Japaneseindustrial patriotism
- In 2017 WDCmade a bid to acquire Toshiba Memory (today Kioxia) that Toshiba Corp wanted tosell to pay for its heavy losses in its US nuclear operations. The WDC bidconsortium set up by WDC CEO Milligan was well thought, with many japanesesbancks and corporate entities to insure a large approval in japan. It wasnevertheless rejected because it was seen as the sell of of the japanese bestindistrial asset to foreigners. Adding to that Apple said that they will notbuy any Toshiba Memory products in the futur if the merger was to become areality. Instead Toshiba Corp finay sold 60% of Toshiba Memory to a consortiumled by Bain Capital (with SK Hynix and Apple among others). This solution wasadopted because it left open the possibility for Japan to regain control ofToshiba memory (Kioxia) when the time as come for Bain Capital to get is moneyback.
- During thelast 48 hours, Kioxia has repeated that it would prefere an IPO solution,probably in september, rather that being sold to a foreign acquirer.
- And Micronalso said that if a consolidation is needed, Micron would not act as the consolidator.So, a Micron - Kioxia deal seems out of the picture now.
- The one dealleft is between Micron and WDC but, as said above, this merger could face anticompetitive regulations in China. A solution to that is for WDC to sell its HDDdepartment (to SK Hynix for exemple). That would reduce the global impact of amerger in terms of memory market share. But the merged entity would still have31% of the NAND market.
- Hosseini estimates that Kioxia and Western Digital together control about 34% of the NAND market, with Samsung just behind at 33%, and SK Hynix and Intel combined at 16%, and Micron at 14%. He estimates that Western has about 15%-20% of the enterprise solid-state drive market, with Samsung at about 50%, Intel at 25%. and Hynix and Micron at under 5% each.
- The analyst thinks that Micron’s NAND business is becoming “increasingly marginalized” given the pending SK Hynix deal for Intel’s NAND unit.
- “Acquiring Western would help Micron with access to additional NAND wafers while not having to deal with a high capex structure,” he writes. “Kioxia and Western Digital [and predecessor SanDisk] have been partners and competitors for decades. The same three-way partnership could exist with Micron acquiring Western Digital, which would effectively sustain the JV structure while enabling Micron to secure additional NAND wafer capacity without building any new fabs.”
TheWDC conundrum
- In 2017, Milliganlost the battle in Japan, and probably his job as WDC CEO, because it is clear,in retrospect, that WDC had to find – and still has to find - a solution to growin size if it is to remain competitive in the memory business. Milligan won the Sandisk battle but lost the Kioxia battle – a bridge too far. Another strategy has to be devised.
- One of thefirst decision of the new WDC CEO was to split the company in two clarlyseparate parts, flash and HDD. Such a move made WDC a more attractive target,as the buyer could sell the HDD part to pay for the acquisition of the flashbusiness. From this moment it was clear for many commentators that WDC was onsell.
- SK-Hynixbuying Intel NAND business, Micron is now the only viable candidate to buy WDC.But it remains to be seen if the selling of the HDD business will be enough towin regulatory approval in China.
- If there isno way to win approval in a reasonble delay, Micron could try anotherconsolidation strategy and become co-owner of an industrial asset along withKioxia and WDC.
- Namely,Micron could invest in the new fabrication facility at Yokkaichi plant, ifKioxia and WDC wanted to share the financial burden – And the risks, if thisnew facility was to experiment mass production of a new memory product. Kioxiaand WDC needs money and Micron, wich his still profitable, and has a very lowindebtment ratio should be willing to pay. Especially if the proceed of theselling of its 3DXL (Optane) foundry is now availlable for another use.
Buying a critical technology : problems and solutions
- It is becomingclear to everyone that the maket is waiting a new memory product. The technicaleco system has made a lot of progress recently (CXL) but a fast, reliable andlow cost non-volatile memory cell is still missing to really change things for this market.
- Micron has publiclystated that it is looking for another solution to replace its investment in3DXL.
- WDC has alicence from for such a product (the licence has to be considered as granted atthis stage). So, in buying WDC, Micron will have access to a new solution, tothe Sandisk research labs that has probably been working on it for the last fewmonths, and to a new production facility now in construction. Difficult to notsee the ducks falling into line. What could go wrong ?
- The problemcould be the place of 4DS in the global plan. Is it important or not ?
- If 4DS isimportant, it could become a problem for the global consolidation project.Because 4DS is not controled. Anyone wanting to derail the consolidationprocess could buy 4DS and reach a blocking stake before any other pieces of thegame start to move.
- Until now,the NDA with imec and with WDC still keeps this threat at bay. But with theMicron takeover of WDC becoming a clear possibilty, people will start to lookfor clues. And 4DS could come into light before anything is done (regulatoryapproval) on the WDC takeover front.
- The point isthat the buying of 4DS gives the exlusivity on the new technology. And Thatcould change the price Micron is willing to pay for WDC.
- What is inthe best interest for Micron and WDC is to keep sticktly silent about 4DS anddismiss any interrogation about it.
- That is in IF 4DS plays a role in the grand plan. If it is just another technology in WDCportfolio, Micron will not be to worried about it. It will get the licenceanyway.
- But ifSandisk tests on the first platfom lot (built with HGST input – in bold in 4DS reports) is enough to shows that thetechnology is realy THE TECHNOLOGY, then WDC or Micron should wich to securethe exclusivity and that means buying 4DS. But that could prove a difficulttask.
The 4DS conundrum : how will you sell it ?
- As soon asthere is a public bid for the company, the price will rise out of reach,because many operators will have serious reasons to derail the acquisitionprocess considering the consolidation process that is behind.
- It seemsthat there is no other way to sell 4DS than through a non public process. Or atleast a process that will take place during a trading halt or a tradingsuspension. All these processes will need an ACCC approval and a vote ofshareholders. Here are a few solutions that the board can choose :
o Selling theintellectual properties with payment in shares of the bidder. 4DS will beliquidated after that and the shares recived in payment will be returned toshareholdes (Tax free if the payment is at least 90% of net asset is transferdto the buyer)
What happens in a voting stock-for-assets acquisition (typeC reorganization)? How can this transaction qualify as tax-free? In a votingstock-for-assets acquisition, the buyer offers shares of its voting stock forsubstantially all of the assets of the target company.
The target company must liquidate after the transaction, anddistribute the shares in the buyer to the target shareholders in liquidation.Tax-free status requires that at least 70 percent of the fair market value ofthe gross assets and 90 percent of the FMV of net assets of the target companybe transferred to the buyer
o A reverse triangular merger where the acquirer will use or create a subsidiary that willmerge with 4DS in exchange for an amount of the bidder shares. 4DS will stillexist and the patents will still be in its name but all the shares will be soldagainst the shares of the bidder (this solution is mainly used to avoid thetransfer of liabilites to the bidder)
Reverse triangular merger
In a reverse triangular merger, the subsidiary merges into the target, with the target surviving and the subsidiary disappearing. The acquirer receives all of the target’s ownership interests and the target becomes a wholly-owned subsidiary of the acquirer. Both the acquiring and acquired business entities remain in existence and the acquirer does not assume the target’s liabilities.
https://www.wolterskluwer.com/en/expert-insights/what-are-the-different-types-of-business-mergers
But all in all, in this very special situation, corporate interests seems to be in conflict with shareholders interest as defined by the law.
The company BoD and the bidder (wich should be known by now), will want a quick process so as to avoid a third party hostile action, but the law provide that this acquisition should be submitted to shareholders vote, wich means some delays to call for a vote. And during this delay, the price could run out of reach and a third party could reach 19% . A trading suspension could be granted by ASX, but it is not a sure thing even if the selling process has been agreed for by ACCC.
An hostile action by a third party could be very exciting for short term holders for a few days. But if it derail all the process, the majority of shareholders will probably lost the possibility to sell all their share at a fixed price.
There is a short period of vulnerability and the author of those lines didn't find a practical solution to sell the company without risk for the global project.
But this solution certainly exist, so this work is still in progress.
Pure fictionnal story for distraction purpose.
No financial advice.
The Grand Plan .............................(A corporate...
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