Toshiba must build bridges to get past Western Digital roadblock

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.