The storage market continues to decline, driving the merger of Armor and Western Data

Source: Xinzhixun

    On May 16th, according to Reuters citing sources, Japanese storage chip giant Kioxia and American storage manufacturer Western Digital are accelerating merger negotiations and have finalized the transaction structure. The main reason for this result is that the continuous downturn in the storage chip market has forced the two storage chip manufacturers to consider merging to enhance their competitiveness and risk resistance.

    The report states that the global storage chip market‘s sharp decline in demand, coupled with oversupply, has brought heavy pressure to Armor and Western Data. If the NAND Flash storage chip businesses of these two companies can be further merged, it will enhance their competitiveness in facing competitors such as Samsung Electronics.

    According to the current negotiations, the merged company will be held by Armor Xia at 43%, Western Data at 37%, and the remaining shares will be held by the existing shareholders of the two companies.

    The source emphasized that the two sides are still in the negotiation stage and have not made any decisions, so the details may eventually change. In addition, the planned merger case may also be subject to antitrust scrutiny from several countries, including the United States.

    The predecessor of Armor was Toshiba‘s storage department. In 2018, Toshiba sold more than half of its equity to a consortium led by Bain Capital for $18 billion, and currently holds 40.6% of Armor‘s shares. Originally, Armor had planned to go public independently, but since last year, due to the continuous decline in the storage chip market, Armor‘s financial situation has been severely affected, resulting in the listing plan being temporarily put on hold.

    The latest quarterly financial report released by Armor Xia shows that the selling price of NAND Flash in the first quarter of this year has significantly decreased by about 25-29% compared to the fourth quarter of 2022. Coupled with customer inventory adjustments, it has suffered a loss of over 100 billion yen, breaking a historical record. The consolidated revenue for the entire fiscal year 2022 (April 2022 March 2023) decreased by 16% year-on-year to 1282.1 billion yen, resulting in a consolidated operating loss of 99 billion yen (operating profit of 216.2 billion yen in the previous year) and a consolidated net loss of 138.1 billion yen (net profit of 105.9 billion yen in the previous year).

    At present, Armor and Western Data jointly operate a NAND Flash wafer factory in Sikki City, central Japan. Under this relationship, Armor and Western Data have had merger negotiations since 2021. However, due to a series of issues such as differences in company valuation, the relevant negotiations have come to a standstill. In January 2023, there were rumors in the market that these two companies had resumed negotiations for a merger.

    In the future, if both parties successfully achieve a merger, the merged company of Armor and Western Data will control one-third of the global NAND Flash market, which will help it further compete with Samsung, the world‘s largest NAND Flash manufacturer. At present, due to insufficient market share and price control ability, Armor and Western Digital are more susceptible to fluctuations in the NAND Flash market compared to major competitors such as Samsung and SK Hynix.

    The report further emphasizes that Elliott Management Investment Company has been pushing Western Data to split its NAND Flash business from its hard drive division since its first investment in the company in 2022 due to its holdings of convertible corporate bond preferred shares. Sources have revealed that such a spin off will take place before the merger of NAND Flash business with Armor, and the merged company may seek to go public after the transaction is completed.