Analyst Note| William Kerwin |
On Aug. 25, the Wall Street Journal reported that Western Digital was in advanced talks to merge with rival chipmaker Kioxia for upwards of $20 billion. In our view, such a deal would be a defensive, but prudent, move by Western to reinforce its competitive position in the swiftly consolidating chip market. In the long term, we expect the NAND market to follow the dynamics of DRAM and HDDs, and consolidate down to about three leading players for a largely commoditylike product. We aren’t surprised by the report, especially following reports earlier this year that Western and rival Micron were interested in a Kioxia tie-up. We think Western would be materially better off by beating Micron to the deal, as we think either deal would create three dominant players in NAND, and Western would avoid being on the outside looking in. Nevertheless, a potential deal wouldn’t alter our no-moat or stable moat trend ratings for Western. We view NAND from different suppliers as largely fungible and vulnerable to market supply-demand dynamics and think Western would be expanding its invested capital base without materially improving its returns on invested capital. We also maintain our $70 fair value estimate for Western Digital until a deal is officially announced. Shares are trading up near our fair value following the news.