Western Digital opposes sale of Toshiba Memory
Seeks to continue joint venture but will 'protect rights,' CFO says
TOKYO -- Western Digital remains opposed to any sale of Toshiba's memory unit to a third party, Chief Financial Officer Mark Long said Thursday, underscoring a continued conflict that the ailing conglomerate cannot afford to ignore.
"We want to ensure the continued leadership of our joint venture" as well as "protect our rights and our interests," Long said in an interview with The Nikkei.
Left by the wayside
In a letter to Toshiba's board dated April 9, the U.S. hard-drive maker sharply criticized its treatment by its Japanese partner regarding Toshiba's plans to sell its memory business.
Toshiba has for 17 years operated a joint memory production venture with SanDisk, and later with Western Digital, which acquired SanDisk last May for $17 billion. When Toshiba spun off its memory unit April 1 to pave the way for a sale, it transferred its 50.1% stake in the venture to the new company.
Western Digital argues that its contract with Toshiba restricts transfers of shares in the venture to third parties. The spinoff thus constitutes "a very serious breach of joint venture agreements" that shows disregard for Western Digital's views, the letter said.
The California-based company holds that selling a majority of Toshiba Memory would not let Toshiba circumvent such provisions. It also objects to the Japanese company's offering shares in the memory unit as collateral for bank financing. Toshiba maintains that the contract does not bar it from selling Toshiba Memory.
Not fair value
The letter was also critical of the bidding process for Toshiba Memory. Offers of 2 trillion yen to 3 trillion yen ($18.3 billion to $27.4 billion) by some suitors -- as well as the valuation of at least 2 trillion yen given by Toshiba -- far exceed the fair, supportable value of the business, Western Digital argued. It cited high labor costs and a need for sustained investment in production facilities, in explaining its objections to the high prices.
The company expressed grave misgivings about the other bidders, singling out U.S. chipmaker Broadcom for particular criticism.
Long expressed similar concerns, arguing that the bidding process is "designed simply to maximize price" and not conducive to building sustainable relationships. He referred to other offers as "noise" intended "only for short-term benefit" and called for constructive discussions based on the joint venture agreement.
Though the letter threatened legal measures, Long indicated that Western Digital would prefer to avoid going that route. "We will spend as much time as we need to spend, and talk to as many of the different stakeholders as we need to talk to, to ensure that we give this process the best chance to succeed," he said.
The CFO noted that Japanese and U.S. government officials have spoken about the sale this week, calling this development "extremely positive."
"We are optimistic that we can have the right kind of dialogue with Toshiba," he said.
Toshiba cannot simply brush off these objections. The Japanese conglomerate, SanDisk, and now Western Digital have operated top-of-the-line chip fabrication facilities together in Yokkaichi, Mie Prefecture, for the better part of two decades, sharing technology and building a relationship of mutual prosperity. "Divorce is no longer possible," a top Toshiba official said.
Toshiba pays for the land and buildings, while the two sides evenly split the massive outlays on production equipment, with a total of more than 3 trillion yen invested so far. This arrangement has allowed the companies to challenge global memory market leader Samsung Electronics.
"It is very unusual that a joint venture can be successful and can be as successful as our joint venture has been for as long as it has been," Long said.
The contract stipulates that shares in the joint venture may not be sold to third parties without the other partner's consent. But SanDisk, not Western Digital, was Toshiba's partner at the time the contract was signed. The agreement was maintained as is when Western Digital bought the smaller company last year.
For Toshiba, the contract was based on a relationship of trust with SanDisk, a laid-back, technically oriented company, a Toshiba source said. The replacement of SanDisk with Western Digital -- a mature giant lacking SanDisk's startup spirit -- has contributed to the current friction.
Western Digital's huge investment in SanDisk to secure a new growth business means that giving up its stake in the Yokkaichi facilities is not an option. Toshiba, too, is starting to see no choice but to work toward a compromise. Doing so will be vital to arranging the sale of Toshiba Memory and engineering a return to financial health.