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August 29, 2017
martinwolf  Transaction Analysis
Western Digital Acquires Tegile, Upthere Ahead of Deal with Toshiba that "Could Go Down to the Wire"

Financial Information
  • Terms of Transactions Not Disclosed
Transaction Facts
  • Chipmaker Western Digital (NASDAQ: WDC) announced today that it has entered into a definitive agreement to acquire flash storage vendor Tegile Systems in a deal expected to close on September 4. Additionally, Western Digital completed the acquisition of cloud services company Upthere yesterday. 
  • Amidst these deals, Western Digital may face complications as it, along with its consortium, seeks to acquire Toshiba's NAND flash memory unit for $17.4B. According to Barron's, both parties "could go down to the wire" and spill past Toshiba's self-imposed August 31 deadline to secure a buyer.
  • Western Digital shares were down 0.54% at $90.07 at market close today.
Maximizing Market Share through Strategic M&A
  • High Stakes: These two smaller  acquisitions precede the high-stakes deal for Toshiba's chip unit; for Toshiba, f ailure to a secure a deal by the end of 2018 would result in a delisting of its shares from the Tokyo Stock Exchange. According to The Japan Times, Western Digital will not seek to have veto power in Toshiba's chip unit to avoid the long antitrust screening process and will buy $1.3B of the chip firm's convertible bonds, limiting voting rights to ~15% . Further complicating the deal, Western Digital has pursued legal action against Toshiba over its rights as a U.S. joint venture partner in Toshiba's memory chip production -- Western Digital inherited a stake in the joint venture when it completed its  acquisition  of SanDisk in May 2016, but Toshiba denied Western Digital any rights to its new chip technology
  • Big Competition: While the global hard disk drive market is shrinking, the flash memory market is growing rapidly -- according to IHS Markit, the global NAND flash memory market reached $36.7B last year and will grow 40% until 2021. In this sector, Samsung Electronics is the predominant player; Samsung's market share increased by 2.9 percentage points to 36.7%, whereas Toshiba's market share fell 4.5 percentage points to 17.2% and Western Digital's fell 0.5 percentage points to 15.5% in the first quarter of this year. According to Nikkei, Samsung's robust position in the market was a strong factor in why Toshiba changed its preferred bidder to Western Digital -- the combination of both companies would create a market share of over 30%.
  • Cloud-Based Storage: Western Digital is seeking to advance its capabilities through other high-value additions. Upthere is a cloud services company that provides users with a single cloud-based storage space. In July 2016, Upthere announced $77M in total funding -- mainly led by KPCB and Western Digital. Upthere will operate under Western Digital's Client Solutions unit and help enhance its cloud services offerings.
  • Flash Array: Western Digital also has interest in expanding its hybrid offerings with its acquisition of Tegile. Since its founding in 2010, Tegile has raised $178M in venture funding -- with $33M in its last round from Western Digital -- as it developed valuable hybrid and all-flash storage arrays using its patented technology called IntelliFlash. The company competes with the likes of Pure Storage, Nimble Storage, and Tintri. As customers' storage needs continue to evolve, the Tegile acquisition will help Western Digital's Data Center Systems unit capture a greater share of the flash array demand, in addition to bringing 1,700 new customers to Western Digital's client base. 
For more information on the Toshiba negotiations,  click here to read the Barron's report. For more information on the transactions, click here for the press release on Tegile and click here for the press release on Upthere. 

martinwolf was not the advisor in this transaction.

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With offices in the San Francisco Bay Area and New York, martinwolf is a leading M&A Advisory focused on middle market companies in the IT Services, IT Supply Chain, IT-Enabled Business Process Outsourcing and Software as a Service (SaaS) space. Since 1997, our team has completed more than 150 transactions in over 20 countries and sold seven divisions of Fortune 500 companies. 

 

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