Cook weighs Ap­ple's big­gest deal

IPhone maker seeks to pro­tect chips sup­ply by in­vest­ing in Toshiba Corp

The Star Malaysia - StarBiz - - Features -

IT’S been a busy week for Ap­ple Inc. While Chief Ex­ec­u­tive Of­fi­cer Tim Cook showed off the 10th an­niver­sary iPhone in Cal­i­for­nia, his lieu­tenants worked half a world away on what may be­come the com­pany’s largest deal ever.

Ap­ple is in talks to in­vest about US$3bil in Toshiba Corp’s mem­ory chips busi­ness as part of a con­sor­tium led by Bain Cap­i­tal, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter.

Ap­ple plans to take an eq­uity stake that could to­tal 16% in a group that also in­cludes Dell Inc, Sea­gate Tech­nol­ogy Plc and SK Hynix Inc, they said. That sup­port con­vinced Toshiba to sign a mem­o­ran­dum of un­der­stand­ing with Bain and work to­ward a fi­nal agree­ment this month, they said. If the agree­ment is com­pleted, it may ex­ceed Ap­ple’s largest deal yet, the US$3bil ac­qui­si­tion of Beats Elec­tron­ics LLC.

Ap­ple is in­ter­ested in the chip unit be­cause of the strate­gic im­por­tance of flash mem­ory. The compact chips are es­sen­tial for its iPhones and iPods, stor­ing every photo, video clip and an­i­moji. Only a hand­ful of com­pa­nies make the high­est-end tech­nol­ogy and the dom­i­nant player is Sam­sung Elec­tron­ics Co. The last thing Cook wants is to end up de­pen­dent on his archri­val in smart­phones, so he wants Toshiba’s chips unit to stay healthy.

“A lot of this is op­por­tunism,” says Mark New­man, an an­a­lyst with San­ford C. Bern­stein in Hong Kong. “If Ap­ple is in­volved, then they have a lit­tle bit more say in the in­dus­try struc­ture.”

Toshiba has been in ne­go­ti­a­tions since Jan­uary to sell off its chips busi­ness and pay for a losses in its nu­clear busi­ness. The sale has been held up be­cause West­ern Dig­i­tal Corp, a joint ven­ture part­ner with Toshiba in the chips busi­ness, has ar­gued it has rights in any sale and filed for ar­bi­tra­tion in the US Toshiba needs to raise the money by March to avoid see­ing its shares delisted from the Tokyo Stock Ex­change. Toshiba de­clined to comment.

Ap­ple is help­ing swing the deal away from West­ern Dig­i­tal, one of the Cu­per­tino, Cal­i­for­nia com­pany’s own sup­pli­ers that tried to buy the chips unit with KKR & Co.

Ap­ple has ac­tively op­posed West­ern Dig­i­tal’s bid, in part be­cause it would con­cen­trate power within the chips in­dus­try, the peo­ple said.

Ap­ple spokesman Josh Rosen­stock de­clined to comment.

John Con­naughton, Bain’s co-man­ag­ing part­ner, con­firmed the firm is work­ing with Ap­ple and Dell, with­out dis­clos­ing de­tails of the ne­go­ti­a­tions.

“There’s a lot of peo­ple that want Toshiba Mem­ory to be an in­de­pen­dent com­pany,” he said in an in­ter­view on Bloomberg Tele­vi­sion. “The man­age­ment is re­ally aligned with us and sup­ports us be­cause we will be that party that re­tains that in­de­pen­dence.”

Bain is­sued a state­ment iden­ti­fy­ing Sea­gate and Kingston Tech­nol­ogy Co as part­ners as well. The US firm said it would honor West­ern Dig­i­tal’s con­trac­tual terms but that the com­pany is “over-reach­ing” in as­sert­ing its rights.”

Nand flash mem­ory chips are among the most ex­pen­sive com­po­nents of the iPhone and the mar­ket for the chips is con­cen­trated in the hands of just six sup­pli­ers, with Sam­sung hold­ing more than 40%.

For the iPhone maker, Toshiba’s 18% fall­ing com­pletely into the hands of an­other sup­plier would fur­ther nar­row its op­tions and make pric­ing ne­go­ti­a­tions tougher. West­ern Dig­i­tal had a 13% slice of the mar­ket last year and SK Hynix ac­counted for an sim­i­lar por­tion, ac­cord­ing to re­searcher IDC.

Led in Ja­pan by man­ag­ing di­rec­tor Yuji Sugi­moto, Bain worked through spring and early sum­mer to as­sem­ble a bid with two state-backed funds, In­no­va­tion Net­work Corp. of Ja­pan and De­vel­op­ment Bank of Ja­pan.

The con­sor­tium of­fered about 2.1 tril­lion yen (US$19.1bil) and was se­lected as the pre­ferred bid­der in June.

But as West­ern Dig­i­tal and chief ex­ec­u­tive of­fi­cer Steve Mil­li­gan be­came in­creas­ingly vo­cal in its op­po­si­tion, INCJ and DBJ de­cided to pull back.

Ja­pan’s Min­istry of Econ­omy, Trade and In­dus­try then en­cour­aged Toshiba to ac­cept the ri­val of­fer from KKR and West­ern Dig­i­tal, peo­ple fa­mil­iar with the mat­ter said at the time, in an ef­fort to end the lit­i­ga­tion and reach a deal quickly.

But Yasuo Naruke, head of Toshiba’s chips busi­ness, re­sisted the pro­posal, the peo­ple said.

— Bloomberg

Val­ued chips: Toshiba Corp’s Ex­ce­ria mi­cro se­cure dig­i­tal high ca­pac­ity (mi­croSDHC) mem­ory cards are ar­ranged for a pho­to­graph in Tokyo, Ja­pan. Ap­ple is in talks to in­vest about US$3bil in Toshiba Corp’s mem­ory chips busi­ness as part of a con­sor­tium led by Bain Cap­i­tal.

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