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A potential resolution between Toshiba and Western Digital would include continuing their joint investment at the chipmaking operations in Yokkaichi, Japan.

Toshiba and Western Digital close to ending legal dispute

Potentially lengthy antitrust proceedings still loom for memory business sale

| Japan

TOKYO -- Toshiba and Western Digital are close to resolving a months-long dispute that has threatened to block the Japanese group's attempt to sell a flash memory chip unit, a deal that would help rebuild the company's shattered finances.

The settlement could be concluded and announced as early as Tuesday. Both sides are prepared to drop legal actions tied to the dispute. They also would be expected to resume joint investment in their Japanese chipmaking operations.

The apparent agreement comes on the heels of Toshiba raising 600 billion yen ($5.29 billion) in fresh capital to erase the group's negative shareholders equity -- the original motivation for spinning off and selling Toshiba Memory.

Resuming chip partnership

After Toshiba announced plans in February to sell the memory unit, U.S. partner Western Digital sought to block such a deal, saying the transaction would violate their joint venture agreements. Toshiba agreed in September to sell the unit to a group of Japanese, U.S. and South Korean investors, but the lingering dispute with Western Digital hung over the deal.

Western Digital's board has approved signing the settlement agreement. The company is prepared to end legal actions against the Toshiba Memory sale, including an international arbitration case and a lawsuit in the U.S. state of California. Toshiba directors already approved a motion to drop a lawsuit filed in a Tokyo court if Western Digital were to concede.

The U.S. storage device maker may have been moved to settle by the prospect of being frozen out of the memory operations as well as losing a key source of high-tech chips if it continued to fight the sale.

Both sides have agreed to maintain the joint venture deals that enable their chipmaking partnership at the operations in Yokkaichi, Japan. Besides resuming investment in the memory chip facilities, they intend to invest in a new chip plant in northern Japan slated to begin operations as early as 2021.

Embittered partners

Upset by Toshiba's move to sell the memory unit to a third-party buyer, Western Digital filed a request with the International Court of Arbitration in May, seeking to halt the process.

The Japanese group later entertained a buyout proposal that would have included Western Digital, but ended up choosing a consortium led by U.S. private-equity fund Bain Capital. Western Digital threatened further legal action, preparing for what looked to be a fight to the bitter end.

Toshiba, meanwhile, took steps to shut its partner out of Japanese chipmaking operations. Faced with a potential kink in its memory supply chain, Western Digital came around to a settlement in October. By Monday, both sides had agreed on issues including limits on competitors' involvement in Toshiba Memory sought by the U.S. partner.

Toshiba's capital increase this month, in which the company issued new shares to dozens of overseas investors, went a long way toward easing the risk of a second straight year of negative shareholders equity, which would have triggered a delisting from the Tokyo Stock Exchange. But Toshiba still aims to complete the memory business sale by the end of March to ensure continued financial support from its creditor banks. A settlement with Western Digital would move it that much closer.

The sale still needs approval from antitrust regulators in China and elsewhere. Toshiba will turn its attention to working together with the Bain-led consortium and smoothing out the approval process.

But it may yet drag on past the March-end deadline. And even a successful sale will not end Toshiba's problems. The Japanese group needs to figure out how to achieve growth with what remains of its business portfolio after selling off the source of 90% of its operating profit.

Management has identified infrastructure as a pillar of the new Toshiba, but this area offers little immediate prospect of making up for the loss of the memory unit, which generates more than 100 billion yen in operating profit.


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