During the company’s October 30 earnings call Western Digital CEO David Goeckeler started the conversation with the revelation that the company would be split into two, with a new flash-only company to be created in the process. This plan, intended to increase the company’s shareholder value, was the outcome of a process triggered by activist shareholder Elliott in May 2022, which was the subject of a couple of SSD Guy blog posts:
Details Lacking
Although the plan for this break-up is not complete, we can guess at what is involved. Even before Elliott’s involvement Goeckeler bisected the company into separate flash and HDD divisions, and the product lines are largely distinct, so the task of creating two companies will be straightforward. We should expect the greatest change to occur in areas that are shared between the two, largely sales and administrative tasks.
There was some sharing of R&D activities, which led to the creation of the OptiNAND HDD, which is a very successful product. But for the most part development efforts don’t overlap much between WDC’s HDD and flash businesses.
Goeckeler’s presentation gave only a few details of what is to come. The un-named flash business, which sells SanDisk-branded products in consumer markets, is to be spun off via a tax free dividend to Western Digital’s shareholders. HDDs will retain the Western Digital name. The transaction is targeted for the second half of calendar 2024.
Those who remember WDC’s acquisition of HGST will remember that China took a couple of extra years to approve the acquisition, requiring HGST and WDC to operate as separate companies as they awaited that approval. This may once again occur here, and any escalation in the US/China trade war can be expected to add to that time.
Does A Split Make Sense?
For years The SSD Guy has advocated selling HDD and flash using the same sales force, but WDC’s move has led me to rethink that position. Is it still valid?
A few years ago HDD and SSD sold into the same markets and used the same interface and form factors. It made a lot of sense for the same salesperson to have both product types to sell, so that a competitor couldn’t take the business away from WDC no matter which device the customer decided to put into that slot.
Today most SSDs sell in an m.2 or similar flash-only format and use a PCIe-NVMe interface, which is unavailable on HDDs. Meanwhile the HDD market has migrated to only a few niches, largely hyperscalers, storage arrays, and external storage, while SSDs have become an important part of all levels of data processing, from the cloud to the PC. WDC used this chart to illustrate that there is a significant difference in customer mix for the two businesses:
As for the benefits of a salesperson having both devices to sell, today’s customers know exactly what they want and why, and end users are no longer replacing an HDD with a more expensive SSD to see what might happen. SSD and HDD have become two very different businesses, and even though both are used as storage, the significant overlap that once existed has faded.
What About Kioxia?
Goeckler waxed eloquent about the benefits of the Kioxia-WDC joint venture fab, which has indeed been a highlight of the two companies for over two decades. This joint venture has done an excellent job of providing both companies with a competitive cost structure and a high enough unit volume to benefit from significant economies of scale.
We all heard numerous rumors of a Kioxia/WDC merger in recent weeks, although they were silenced when an SK hynix exec explained during its own earnings call on October 26 why his team voted down the merger. It took me quite by surprise when, during the call’s Q&A he announced that the offer price was too low for them to accept. Kioxia’s internal affairs are supposed to be a carefully-guarded secret.
Regular readers already know The SSD Guy’s opinion of a WDC-Kioxia merger. While it would make Kioxia more profitable, it would work to erode WDC’s profits. Since the break-up’s goal is to maximize WDC shareholder value, Western Digital would be ill advised to merge, although a merger would be a positive thing for Kioxia’s often-delayed IPO.
Impact to Customers, Competitors, and Shareholders
Don’t expect to see any really big changes as a result of this move. Customers will see continued supply of the same product quality, although flash products will be billed by a different company and sold by a different sales team. Competitors are unlikely to notice any change at all, as the new company takes over the spot once owned by WDC.
WDC’s management sees a benefit for shareholders, since it will bring a “Clarity of investment profile for Wall Street,” which the company expects to expand its investor base. Time will tell whether investment analysts give the divided companies back the good ratings that they had received before the merger, but this was Elliott’s intention when they requested a split.
Parting Comment
Goeckeler made it very clear that the Western Digital Board remains open to considering alternatives that might deliver a superior value to the proposed separation, should they become available. This break-up is not over until it is over, so there could be a change in direction before the break has been finalized. The SSD Guy will be watching this intently, and updating Objective Analysis‘ clients of any changes and of strategies that they will need to consider in light of these changes.
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