Western Digital to buy SanDisk for $19 billion

In a deal that underscores the dramatic shift from traditional computers to handheld devices, Irvine-based hard-drive maker Western Digital Corp. said Wednesday it will acquire flash-memory manufacturer SanDisk Corp. in a cash-and-stock deal worth about $19 billion.

Under the deal, Western Digital picks up one of the leading manufacturers of the small memory chips crucial for smartphones, tablets, ultra thin laptops, and increasingly, the data centers that power cloud computing.

The combined company will be headquartered in Irvine and led by Western Digital Chief Executive Steve Milligan. After the deal closes, SanDisk Chief Executive Sanjay Mehrotra is expected to join the Western Digital board of directors.

Unlike recent blockbuster deals for Irvine companies Allergan and Broadcom, Western Digital isn’t moving its headquarters from Orange County.

The deal is the latest merger as old-line tech companies combine to stay relevant as the world changes around them. The computer memory industry has reached a record $89 billion in merger and acquisition activity this year, according to research firm Dealogic.

Dell Inc. paid $66 billion for data storage company EMC Corp. earlier this month in the biggest tech merger ever. Smaller deals include Western Digital’s $4.9 billion acquisition of Hitachi Global Storage Technologies in March.

“The cost of gaining market share in most segments is increasing rapidly,” said Handel Jones, chief executive of International Business Strategies Inc., which consults the semiconductor and electronics industry. “With the low cost of money, it’s much better to make an acquisition than develop new products.”

Analysts say the deals have also been driven by Wall Street pressure to increase profit margins in a maturing industry. While it’s a sound strategy for Western Digital to expand into flash memory, they say, demand for the technology will likely taper. That’s because smartphone and tablet markets are also maturing. Big data and cloud computing will also make memory storage more efficient, again diminishing the need for more flash hardware.

Western Digital has about 76,500 employees worldwide, including manufacturing operations in California, Thailand and Malaysia. It generated revenue of $14.6 billion in its fiscal year that ended July 3. SanDisk has over 8,000 employees and generated $6.6 billion in revenue last year.

While Western Digital produces a small number of those flash drives, also known as solid state drives or SSD, it has long focused its business on hard-disk-drives for a declining market in personal computers.

“Western Digital gets to diversify their business into solid state,” said Angelo Zino, an equity analyst for S&P Capital IQ in New York.

SanDisk is credited with introducing the first flash drives more than two decades ago. Instead of reading data from a rotating hard disk, computers using flash memory read it directly, and with far greater speed, from a set of computer chips. The company ranks fourth in global share for flash memory with 14.8% of the market, about half that of market leader Samsung, according to research firm IHS.

SanDisk holds a 15-year-old joint venture with Japan’s Toshiba to manufacture flash drives, a relationship that will continue, Western Digital and SanDisk said.

The deal between the two companies values SanDisk common stock at $86.50 a share, a 15% premium over Tuesday’s closing price. On Wednesday, shares of the Milpitas, Calif.-based company climbed $1.59, or 2%, to $76.78.

Shares of Western Digital fell $3.42, or 4.5%, to $71.44.

The acquisition marks the “next step” in expanding the company’s size, products and technologies, Western Digital said in a prepared statement.

The SanDisk acquisition follows Western Digital’s deal with a unit of China’s Tsinghua Unigroup last month. Unisplendour Corp., known as Unis, paid $3.78 billion for a 15% stake in Western Digital, giving the data-storage disk maker the funds go after SanDisk as well as access to China, one of the fastest growing markets for memory storage.

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