TOKYO -- The Innovation Network Corp. of Japan will enter into negotiations with Western Digital on partnering to purchase Toshiba's memory unit, though preliminary talks suggest that they have a wide gap to bridge.
The Japanese public-private fund's Innovation Network Committee will meet Tuesday to examine the state of the Toshiba Memory sale. The INCJ hopes to sort out any potential investment by around mid-June, before Toshiba's general shareholders meeting late that month.
Not backing down
SanDisk, acquired by Western Digital in 2016, has worked with Toshiba on chip production for 17 years. The parent firmly opposes any transfer of Toshiba's memory business to a third party and demands that Toshiba sell it a majority stake. Western Digital is not currently participating in the formal bidding process and in fact filed a request for arbitration this month to block the auction.
After Western Digital CEO Steve Milligan's recent visit to Japan, an INCJ insider likened the row to a game of chicken.
Sources say Japan's industry ministry, the INCJ and Western Digital have held unofficial talks. The ministry, which oversees the nation's semiconductor industry, has pressed the American hard-drive manufacturer to back off from its demand for a controlling interest.
The ministry would welcome a tie-up between Toshiba and Western Digital, which would let them challenge industry leader Samsung Electronics. But it worries that a majority stake would give Western Digital too much control over the unit and allow Toshiba's top-class chip development technology to leave Japan.
Should the American company continue to insist on a majority stake, the ministry could demand effective veto power for the INCJ over such major decisions as moving operations abroad or making changes at chip fabrication facilities in Yokkaichi, Japan, that are now jointly run by Western Digital and Toshiba. The ministry has leverage, since Industry Minister Hiroshige Seko could turn down the INCJ's investment proposal and thus significantly reduce Western Digital's chances of winning the bidding war for Toshiba Memory.
It's not just the money
The second bidding round that wrapped up May 19 brought four offers -- from U.S. private-equity firms Bain Capital and Kohlberg Kravis Roberts, American chip company Broadcom, and Taiwanese contract manufacturer Hon Hai Precision Industry -- with Western Digital in the mix as well. The INCJ, a much-sought-after partner, will choose which bid to join based on such considerations as growth and technological innovation.
From a purely financial perspective, the top choice would be Hon Hai, or Foxconn, which reportedly offered well over 2 trillion yen ($18 billion). But Toshiba remains cautious about the Taiwanese company's offer. In cutting a deal to acquire Sharp last year, Foxconn lowered its offer for the troubled Japanese electronics maker late in the game. And Toshiba Memory technologies could be leaked to China, since Foxconn operates mainly there.
Placing second is Broadcom, which also bid more than 2 trillion yen. Many insiders see the American company as the current front-runner. Broadcom is not in the flash memory business, which would simplify the antitrust review process. The offer likely holds much appeal for Toshiba and creditor banks, which seek as high a price as possible to get the conglomerate back on its feet after massive nuclear-related losses.
KKR is some way behind, as Toshiba and the INCJ remain cautious about giving in to the U.S. firm's demand for a high return on its investment.
Western Digital's tough stance on the sale could backfire and harm its corporate value if it prolongs the uncertainty surrounding Toshiba's future, given the business relationship between the two companies. Western Digital will likely continue talks with the ministry, providing reassurance that it will not transfer technology or make significant changes at Yokkaichi. Milligan may return to Japan as early as next month to try winning over relevant parties.
Yet a deal between the partners would bring its own problems. Western Digital acquiring Toshiba Memory would create an entity dominating the global flash memory market along with Samsung, with the two rival camps boasting a 60%-plus combined share. Antitrust reviews in various countries would present a major hurdle, requiring half a year or more. If the deal is contingent upon getting the green light from relevant authorities, the odds of the sale being completed within the fiscal year ending next March would dim, putting Toshiba at risk of delisting due to two straight years of negative net worth.
To reduce this risk, Western Digital has proposed an arrangement in which it would hold no voting rights. But authorities could still launch a review after the fact. If the deal is found to hinder competition, Western Digital could be ordered to relinquish its shares in a worst-case scenario.