Toshiba must build bridges to get past West­ern Dig­i­tal road­block

New Straits Times - - Business World -

the adage, keep your friends close and your en­e­mies closer, ever needed a real-life ex­am­ple, it could be found in Toshiba Corp’s in­creas­ingly frag­ile re­la­tion­ship with West­ern Dig­i­tal Corp.

The cash-strapped Ja­panese firm has re­ceived a low-ball of­fer from the North Amer­i­can diskdrive maker, which is also its joint-ven­ture part­ner in a flash­mem­ory chip busi­ness. But if Toshiba is go­ing to fix its fi­nances and avoid a delist­ing, it had bet­ter come to the re­al­i­sa­tion that a fu­ture with­out West­ern Dig­i­tal might be bleak in­deed.

Toshiba is sell­ing its mem­o­rychip unit to raise cash af­ter suf­fer­ing losses at its Westinghouse nu­clear unit. Five groups are in the run­ning: Tai­wan’s Fox­conn Tech­nol­ogy, KKR & Co (with the help of In­no­va­tion Net­work Corp of Ja­pan), Broad­com Ltd, backed by Sil­ver Lake Man­age­ment LLC, South Korea’s SK Hynix and Bain Cap­i­tal LP, and West­ern Dig­i­tal, which hasn’t made a for­mal bid.

Fresh from its ac­qui­si­tion of SanDisk Corp last year, West­ern Dig­i­tal may put up 1.5 tril­lion yen (RM57.78 bil­lion) via con­vert­ible pref­er­ence shares, while ask­ing state-backed turn­around fund INCJ and Devel­op­ment Bank of Ja­pan to pro­vide al­most 500 bil­lion yen in com­mon eq­uity. Ac­cord­ing to re­ports, two tril­lion yen is much less than what other groups are of­fer­ing.

But West­ern Dig­i­tal has Toshiba over a bar­rel. It took the firm to the In­ter­na­tional Cham­ber of Com­merce’s In­ter­na­tional Court of Ar­bi­tra­tion, and has re­fused to al­low Toshiba to use its shares as col­lat­eral to ac­cess a much-need- ed 700 bil­lion yen credit line. West­ern Dig­i­tal has since soft­ened its stance, but the point’s been made: There’s not go­ing to be a sale un­less West­ern Dig­i­tal is in­vited to the party.

Not that a takeover would be trou­ble free. Sim­i­lar to SK Hynix, West­ern Dig­i­tal would al­most cer­tainly fall foul of anti-trust reg­u­la­tors out­side Ja­pan. Chief among those likely to block such a deal is China, which, as Mio Kato, head of re­search at Uz­abase Inc, notes, is try­ing to de­velop its own mem­ory-chip tech­nol­ogy.

“It would be less ac­com­moda­tive to a sit­u­a­tion where Toshiba and West­ern Dig­i­tal com­bined would form an ef­fec­tive global du­op­oly with Samsung,” he said.

West­ern Dig­i­tal has made its op­po­si­tion to a Broad­com takeover well known, while de­spite its re­port­edly higher of­fer, Fox- conn’s prospects aren’t the strong­est, con­sid­er­ing how much ef­fort it took to turn Sharp Corp around. A per­cep­tion that Fox­conn, a big em­ployer in main­land China, may trans­fer Toshiba’s prized chip tech­nol­ogy out of Ja­pan may also work against get­ting Ja­panese sup­port.

That leaves KKR and friends, a group that would ap­pease Ja­pan’s national se­cu­rity con­cerns but leave West­ern Dig­i­tal cold. While it’s un­likely that West­ern Dig­i­tal would ever align it­self with Broad­com, Fox­conn or Hynix, it might just con­sider tak­ing a mi­nor­ity stake in a KKR-led con­sor­tium, which would also keep Toshiba’s cash-starved share­hold­ers happy.

What­ever the case, Toshiba should ac­cept that West­ern Dig­i­tal isn’t go­ing any­where.

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