Toshiba's storage business is sold to Western Digital? Review of the whole process of Toshiba's "sale"

Source: Content compiled from Sina Technology and Zhihu user lolicon, etc. , Thanks.

Reuters quoted people familiar with the matter today as saying that a consortium represented by Western Digital has bid 1.9 trillion yen (about 17.4 billion US dollars) for Toshiba's chip business unit.

Western Digital plans to contribute 150 billion yen by issuing convertible bonds and is not seeking voting rights, the person said.

In addition to Western Digital, other members of the consortium include US private equity firm KKR, the Innovation Network of Japan (INCJ) and the Development Bank of Japan (DBJ). The three parties will invest 300 billion yen each.

In June this year, Toshiba selected the Japanese government-funded INCJ consortium as the preferred bidder for its chip business. Other members of the consortium include the Development Bank of Japan and U.S. private equity firm Bain Capital.

But due to opposition from its partner Western Digital, the consortium later said Toshiba needed to resolve the dispute with Western Digital before investing in Toshiba's chip business.

Yesterday, Toshiba also said that due to the deadlock in negotiations with the INCJ consortium, Toshiba will give priority to negotiating the sale of its chip business with Western Digital. Toshiba President and CEO Satoshi Tsunakawa said that the company will focus on advancing negotiations with Western Digital.

Toshiba needs to complete the chip sale by the end of March next year, otherwise its shares will be delisted from the Tokyo Stock Exchange. Industry insiders said that Toshiba needs to reach a final agreement on the sale of its chip business by the end of August or early September this year to complete the transaction by the end of March next year.

People familiar with the matter said that while trying to complete the sale of its chip business through various strategies, Toshiba is also preparing for a potential delisting. But Tsunakawa also emphasized that Toshiba will do its utmost to avoid delisting.

If the rumors are true, it means that the acquisition plan that Hon Hai Group has been planning for several months has still failed, and Terry Gou's new round of development and transformation strategy is missing an important piece.

Thanks to the surge in demand for flash memory in recent years, especially the price surge since last year, Toshiba, the world's second largest flash memory chip supplier, should have had a good time. But at the beginning of this year, it was reported that Toshiba chose to sell its semiconductor business to cope with the write-down caused by nuclear power due to the drag of its nuclear power business.

But Toshiba is eager to plug the hole in its U.S. nuclear business, which Japanese media currently estimate to be as much as $6 billion, which could complicate its asset sale plans, Reuters reported on January 22.

Toshiba warned in December that cost overruns at U.S. nuclear projects could cost it billions of dollars as it seeks to boost its capital base by the end of the fiscal year to March.

If it fails to neutralize the nuclear business, Toshiba's already slim shareholders' equity could be wiped out, pushing the company's net worth into negative territory - which would jeopardize its role in public infrastructure projects and its status as a member of the Tokyo Stock Exchange's "first section".

Toshiba is banned from raising new funds on the stock market after being embroiled in an accounting scandal in 2015. But asset sales could help it secure broader financial support from its main banks.

According to media reports, Toshiba may sell a 20-30% stake in its chip business.

Toshiba's flash memory chip business is worth more than $10 billion, ranking second in the world after South Korea's Samsung Electronics and is also Toshiba's most profitable division.

The nuclear power business, which is now dragging down Toshiba, was once a business with high hopes.

In 2005, Toshiba spent $4.16 billion (other Japanese companies paid more than $1 billion, a total of $5.4 billion) to acquire Westinghouse Electric Company of the United States. At that time, a new round of nuclear power construction boom was about to take off globally. Westinghouse's AP1000 was the most popular among the third-generation reactors, and it was basically certain that it would win a large order from China, with a bright future (and there was no non-traditional energy such as shale gas at that time). Toshiba spent a lot of money to buy this business. The previous owner, British Nuclear Fuels, spent 1.2 billion to buy Westinghouse. The initial valuation when it was sold was more than 2 billion, and it was actually sold for 5.4 billion.

Why do we have to buy it even though it is so expensive? The reason is that there are huge profits involved. Westinghouse is the world's No. 1 in pressurized water reactor technology (GE is the leader in boiling water reactor technology), but the United States stopped building new nuclear power plants after Three Mile Island, and Westinghouse (GE) has never received a nuclear power plant order since then (other major nuclear power countries all introduced Westinghouse and GE's technology in the early days and achieved self-production in the 1980s, such as Japan, Germany, and France.

GE has received orders from South Korea, but it is in cooperation with local Korean companies, and a large share of the work does not belong to GE. It can only rely on the maintenance and upgrade of existing nuclear power to maintain its capabilities. Therefore, although the two most technologically advanced nuclear power companies in the United States have retained complete R&D capabilities, their production and construction capabilities have declined significantly.

Japan is different. It has been maintaining its nuclear power plant construction, and with the evolution of its models, its production and construction capabilities have been continuously enhanced. It has also entered the European nuclear power construction market dominated by Areva and Siemens (as the most important supplier). As for the emerging nuclear power suppliers such as South Korea's Doosan, Chinese companies still have a big gap with Japanese companies.

If the American companies with the strongest technology and the Japanese companies with the strongest productivity join forces, it will be easy for them to dominate the world nuclear power market. GE is a national treasure of the United States and has super strength, so the Japanese can only join forces; Westinghouse is weaker, so they can swallow it up. Although they cannot get Westinghouse's exclusive technology after the acquisition (Sea Wolf's S6W is Westinghouse's product), they can control the nuclear power supply chain headed by Westinghouse and realize "American design, Japanese manufacturing". Therefore, it is worth spending $5.4 billion.

Later, Toshiba's actions went smoothly. In China, its largest market, Toshiba obtained large orders through operations. It was expected that the huge market of 80 million kW installed capacity (based on the minimum valuation of US$3 billion per 1 million kW, that is, US$240 billion) would fall into the arms of Japanese companies in the next 20 years. Based on this, further dominating the world's nuclear power would be a piece of cake.

In 2012, Toshiba's (including Westinghouse) nuclear power business was 520 billion yen. With the gross profit margin of this market, it would not take long to earn back 5.4 billion US dollars, not to mention that they have only started building 4 units in the Chinese market, and there are 40-60 units waiting to be built.

But, please note, the Fukushima nuclear accident broke out, and since March 11, 2011, Toshiba's nuclear power department has not received even a single new order.

What should Toshiba do? Should it just wait to die? Toshiba decided to start capital operations.

If Toshiba cannot get the order, it can first buy the nuclear power construction company (which can be understood as the nuclear power power company), sign an order with its subsidiaries to sell equipment, and then sell the nuclear power construction company in the capital market to recover funds.

A simple example is in the UK, where Toshiba was originally planning to acquire NuGen. The company plans to operate a nuclear power plant with a total output of 3.6 million kilowatts in central England by around 2025. Mastering the company's operating rights will help Westinghouse obtain nuclear reactor orders. Around obtaining the operating rights of NuGen. Large power operators GDF-Suez of France and Iberdrola of Spain each hold 50% of NuGen's shares. Westinghouse is negotiating to obtain about 40% from Iberdrola and about 10% from GDF-Suez, for a total of about 50% of the shares.

The acquisition amount is expected to be around 10 billion to 20 billion yen. However, Toshiba's final investment amount may increase. The land use contract for NuGen's planned new nuclear power plant is about to expire, and there is a view that the British government may require Toshiba to increase the rent when renewing the contract. If this happens, the total investment including the acquisition of shares is expected to reach about 40 billion yen.

You see, it only cost more than 300 million US dollars to acquire this company. The company plans to build 3.6 million kilowatt nuclear power units, and the cost of these units is about more than 12 billion US dollars. Toshiba can actually get orders of at least 5-6 billion. You see, using less than 400 million US dollars in capital operation to leverage 5-6 billion orders, isn’t this a "smart" operation!

It’s a pity that the capital operations of Britain and the United States are far more sophisticated than those of the Japanese.

This time it was revealed that someone had planted billions of dollars in huge losses (which can be understood as debts) in the American Shi Wei Company and deceived Toshiba (Westinghouse) into buying it. No matter how much money Westinghouse spent to buy Shi Wei, Toshiba must compensate for the billions of losses.

Toshiba worked hard for a year and earned 2-3 billion US dollars (not excluding one-time income from the sale of companies), which is a very good result among Japanese companies. However, it was turned into a net loss of 390 billion yen by these British and American bookmakers.

In December 2015, Toshiba acquired the nuclear engineering business of Chicago Bridge & Iron through its US nuclear energy subsidiary Westinghouse Electric for US$229 million. Toshiba's acquisition was a scam by the Americans, because after the acquisition was completed, Chicago Bridge & Iron sued Westinghouse Electric for the working capital calculation method in the transaction (calculating the working capital and liabilities of the two delayed US and projects); because this part of the cost has been greatly inflated.

Note that Westinghouse (a subsidiary of Toshiba) spent $229 million to buy the nuclear power business of this company. How much debt did this business have? Westinghouse needs to repay the debt in full. Toshiba has included $1 billion in its financial statements, and according to news, it may eventually reach $4.2 billion. In other words, Westinghouse (a subsidiary of Toshiba) spent $229 million to buy a debt of $4.2 billion that it owed to others. That's it, Toshiba's choice to sell the semiconductor business is inevitable.

After the news of Toshiba's sale of its semiconductor business came out, many potential buyers were eager to make a move. Among them, Hon Hai Group and Western Digital were the most enthusiastic. However, Japan has many requirements for the acquirer. Japanese officials have made it clear that they will block any transaction that may lead to the outflow of high-value chip technology from Japan, and will regard the participation of investors with government backgrounds as a key approval mark. People familiar with the matter said that the Industrial Innovation Agency and the Policy Investment Bank of Japan have separately expressed to Toshiba their intention to participate in the bidding, but did not disclose specific details.

According to a report by Reuters on April 12, in the first round of bidding, U.S. chipmaker Broadcom Ltd. and U.S. investment fund Silver Lake Partners made the highest joint bid for Toshiba's chip business, about 2.5 trillion yen (about 23 billion U.S. dollars). Taiwan's Foxconn ranked second with a bid of 2 trillion yen (about 18.5 billion U.S. dollars). The bid of U.S. hard drive giant Western Digital Corp. was much lower than the first two. The bid of South Korean semiconductor giant SK Hynix Inc. has not yet been known.

It is reported that about 10 companies participated in the first round of bidding, and the above four companies were selected by Toshiba to enter the second round of bidding. Among them, Foxconn led by Terry Gou was the most active.

In June this year, Japanese technology giant Toshiba gave the priority negotiation rights of its semiconductor business to the "Japan-US Alliance" composed of Japanese financial institutions and American private equity firms. In response, Hon Hai Chairman Terry Gou not only explained to the media after the shareholders' meeting on the 22nd that the matter is not over yet, and Hon Hai still has a 50% chance of success in the future.

As for the benefits of Hon Hai's investment in Toshiba, Terry Gou also said that the original plan was to invest in Toshiba. In addition to improving management efficiency by being close to Sharp's factory, they also planned to set up factories in the United States in the future. In 2016, Taiwan Innolux lost a lot of money due to the Tainan earthquake. In the future, in the semiconductor industry, the impact of earthquakes must also be taken into consideration, so they plan to invest in the United States. In addition, the United States has the most semiconductor talents in the world, and it can disperse risks and balance US-Japan trade, which will be a good way to kill two birds with one stone. In the final analysis, it can be summarized into the following three aspects:

The first reason is the same as the reason for taking over Sharp and holding panels. Consolidating existing customers will immediately increase the company's revenue and profitability, driving Hon Hai back to a high growth track. Customers' purchases are expected to shift from low-profit components to high-value upstream components such as panels and memory.

Yang Yingchao, former chief analyst of downstream hardware in Asia Pacific at Barclays Capital Securities, pointed out in a previous media interview that Hon Hai is focusing on Apple orders. Although Hon Hai is the largest assembly plant for Apple, the revenue it gets from it is pitifully small, and the profit is not proportional to the selling price.

According to the analysis of the research institute Tech Insights, the total cost of the 4.7-inch iPhone 7 is about US$275. In terms of the cost of materials and raw materials, the panel alone is US$37, and the hybrid memory is US$25.5, accounting for nearly 23% of the cost, which is several times higher than the cost and revenue of Hon Hai in terms of casing, connectors, assembly costs and revenue. Toshiba is already an existing supplier of Apple. Once Hon Hai takes over Toshiba, not only will Hon Hai's revenue jump immediately and return to the high growth momentum of revenue, but it is also expected to get a higher proportion of orders from Apple in the future than the current level.

In addition to Apple, its largest customer, Hon Hai can also replicate this strategy with other customers, thereby increasing Hon Hai's revenue and profitability.

The second reason is to accelerate the transition to the Internet of Things, big data and artificial intelligence. "8K imaging, big data and other applications generate massive amounts of data, which ultimately require a large amount of storage equipment, and massive 8K imaging big data can be analyzed to produce useful artificial intelligence," Guo Taiming said concisely and forcefully, "This is why I am interested in Toshiba memory." He also believes that 8K information will drive an increase in demand for semiconductors, and Toshiba's memory will be needed for storage.

In fact, Foxconn is building an 8K TV ecosystem in Shenzhen. Guo Taiming said last year that he was working with Japan's Sharp to develop semiconductor production capabilities. Foxconn initially hopes to produce chips for connected TVs. With Japan's SoftBank taking over ARM last year, the "Foxconn + SoftBank + ARM" alliance established a chip design center with ARM in Shenzhen, China, entering the semiconductor design and manufacturing industry to design chips needed for the Internet of Things.

The industry also revealed that Foxconn had tried to develop ASIC (Application Specific Integrated Circuit, special specification logic IC), but the effect was limited. However, ASIC is an important chip used in robots, white appliances and other Internet of Everything with the rapid growth of the Internet of Things.

Market research firm IC Insights predicts that the IoT chip market will grow by 19% to $18.4 billion in 2016, and is expected to continue to expand to $29.6 billion in 2019. International Data Corporation (IDC) even predicts that the overall IoT market size will exceed $5 trillion in 2019.

Since Sharp itself has a semiconductor department, and Foxconn's subsidiaries Tianyu, Xunxin, and Jingding are all related to semiconductors, this has laid the foundation for Foxconn Group to cross IC design, packaging and testing, and memory.

The third reason is the integration of upstream and downstream. Foxconn has integrated assembly from components to downstream. In 2013, it separated an independent sub-team to work on slimming down. Now it is reorganizing through mergers and acquisitions, and has acquired brands, home appliances, and panels from Sharp. If it can successfully take over Toshiba and acquire semiconductors, Foxconn will not only complete the upstream and downstream integration plan from downstream assembly, midstream components to upstream semiconductors, but will also transform from "Foxconn of manufacturing" to "Foxconn of technology services". The world's second Samsung will be officially born, completing Terry Gou's lifelong ambition and wish.

But after this news came out, Guo Taiming’s wish may really be dashed.

Western Digital, the final buyer of Toshiba, has been a spoiler in the Toshiba sale because of some previous cooperation. And his previous deal with SanDisk made him a spoiler with a say.

Toshiba initially established a chip joint venture with Sandisk and invested in it together, but in 2016, Western Digital acquired Sandisk, thereby acquiring the interests in Toshiba's chip joint venture.

Western Digital has been opposed to Toshiba's sale of its chip business. As early as April this year, Western Digital said that if Toshiba sold its chip business, it would violate the contract between the two companies. Western Digital CEO Steve Milligan also wrote a letter to Toshiba's board of directors, saying that Toshiba should first conduct exclusive negotiations with Western Digital.

In mid-May, Western Digital announced that it had initiated arbitration proceedings through the International Chamber of Commerce Arbitration Court, requiring Toshiba to stop splitting the joint venture assets into an independent company "Toshiba Memory" and not to sell this part of the business without the consent of Sandisk, a subsidiary of Western Digital.

Western Digital's many obstacles are closely related to its low profile. Although Western Digital participated in the bidding for Toshiba's memory chip business, it is not in an advantageous position compared with its wealthy competitors.

Sources said Western Digital is now willing to become a minority shareholder in Toshiba's chip unit and increase its stake to more than half through a transaction when KKR and INCJ consider exiting their investments. However, it is still unknown whether the transaction will be approved by Japanese regulators. The Japanese government has previously stated that the semiconductor sector plays a vital role in its national security and Toshiba's chip unit should not be controlled by a foreign manufacturer.

After the rumors of Toshiba's sale to other manufacturers, Western Digital has been raising red flags on the deal, believing that Toshiba's sale of its semiconductor business would leak Western Digital's key technologies. Therefore, Western Digital has been raising red flags on the deal and has filed a lawsuit against Toshiba in the United States, seeking to ban the sale of Toshiba products. Now Toshiba is "fighting back" and countersuing Western Digital, hoping to break the deadlock in semiconductor sales from a legal perspective.

The rumored final buyer may be the best outcome after Toshiba weighed various options and negotiated with Western Digital.

Western Digital plans to initially invest in the chip unit through debt financing and eventually own less than 20 percent, the sources said, speaking on condition of anonymity as they were not authorized to speak to the media.

Toshiba's relationship with Western Digital soured in May last year after they failed to reach a consensus on a new joint venture contract.

Toshiba hopes to complete the sale of its chip business by the end of the current fiscal year in March next year to ensure it does not record negative net assets for a second consecutive year and avoid being delisted from the Tokyo Stock Exchange.

Given that regulatory approvals may take some time, Toshiba hopes to reach an agreement by the end of the month so that the transaction can be completed by the end of March.

Perhaps, this bustling acquisition case has finally come to an end.

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