(Bloomberg) — Western Digital Corp. is pitching a fresh proposal to acquire Kioxia Holdings Corp. four years after it lost out on a bid to take over the former Toshiba Corp. chip unit. But the U.S. company’s offer faces familiar hurdles.
Among the challenges, Kioxia’s senior management would prefer going public, officials in the Japanese government are concerned about losing control of a chipmaker and Chinese regulators are likely to block a U.S. takeover, according to people familiar with the matter. Kioxia plans to file for its initial public offering as soon as next month to capitalize on strong investor demand for chip stocks, said one of the people, asking not to be named because the matter is private.
Western Digital and its bankers have been aggressive in pitching a deal, offering a high price and describing it as a merger, the people said. Bain Capital, which controls Kioxia along with Toshiba, is open to a combination, one person said.
Political opposition may be the biggest hurdle. Japan’s government has always been protective of its high-tech companies and the powerful Ministry of Economy, Trade and Industry helped decide the bidding war four years ago when Toshiba sold a controlling stake in the chips unit to the Bain-led consortium.
One faction at METI is open to discussing a Western Digital deal, but another faction opposes a sale, one person said. Japan’s government has been planning to invest billions of dollars into fostering the domestic semiconductor industry, so losing control of its most prominent chipmaker would seem to be in conflict with that goal.
METI hasn’t decided whether to approve the deal. Prime Minister Yoshihide Suga and Akira Amari, the politician championing local semiconductor investment, will likely make the final decision, one person said.
China is a bigger hurdle. Beijing has been increasingly resistant to approving acquisitions by American companies as tensions with the U.S. government surge. Chinese regulators have yet to approve Nvidia Corp.’s proposed acquisition of SoftBank Group Corp.’s Arm Ltd. — with many analysts proclaiming the deal effectively dead.
Chinese approval of a Kioxia sale could also prove problematic. If the memory chip manufacturer falls into the hands of an American company, it would be directly subject to any restrictions on sales determined by President Joe Biden’s administration. Kioxia’s management risks getting tied up in a merger deal that China could review for a year or two — and then reject.
“The deal has zero merit to Kioxia,” said Akira Minamikawa, an analyst a Omdia.
He pointed out that Kioxia and Western Digital already cooperate on the production of NAND flash memory. The American company would likely use its control to shift the balance toward memory chips for personal computers, rather than for smartphones as Kioxia has preferred.
“By buying Kioxia, Western Digital wants to change allocation of output for the biggest benefit for the U.S. company,” he said.
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The deal is already a stretch for Western Digital financially. The proposed acquisition, which would be done with cash and stock, would value the target at more than $20 billion, one person has said. Western Digital’s market value is just below that level.
Certain factors have changed in favor of a deal since Western Digital failed in its bid four years ago. Chief Executive Officer Steve Milligan, who led the charge at that time and infuriated top executives at Toshiba, left his post last year. Yasuo Naruke, the former CEO of Toshiba Memory who forcefully fought the takeover, passed away last year.
Relations between the two companies are less bitter, but not warm. Milligan’s replacement is David Goeckeler, who has been floated as the likely candidate to run the combined company.
But Kioxia has not yet agreed on who will take the CEO job or which top executives would lead the management, one person said. The structure has also not been determined.
Japanese financial institutions, which would likely be needed to finance a deal, have not been involved yet, the person said. Financing would have to be worked out after the structure of the deal is finalized.
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