This article was first published on Insightia’s Activism module on May 4, 2022. For more information about the product, click here.
Elliott Investment Management has urged Western Digital to separate its flash memory chip business and said it was willing to put in $1 billion to help such a plan, which the activist reckons can double the company’s stock price.
In a Tuesday open letter, Elliott disclosed a 6% stake in Western Digital and argued the company should sell or spin off its NAND flash memory unit because it lacks synergy with the company’s other segment that makes hard disk drives (HDDs). The activist said the two businesses are “vastly different” and this has affected management’s performance.
“We believe a full separation of the flash business can allow both HDD and flash to be more successful and unlock significant value,” wrote Elliott Managing Partner Jesse Cohn and Senior Portfolio Manager Jason Genrich.
“By executing on a separation, we believe Western Digital’s stock price could reach $100+ per share by the end of 2023, representing uniquely attractive upside of approximately 100%,” they added.
The stock was up more than 12% at $60.21 each in early morning trading Tuesday following Elliott’s letter. The stock was trading above $70 a year ago.
Elliott is ready to invest more than $1 billion in the standalone flash business at an enterprise value of $17 billion to $20 billion to be used either in a spin-off transaction or as equity financing in a sale or merger with a strategic partner, the letter reads.
In a statement Tuesday, Western Digital pledged to “carefully consider” Elliott’s ideas, adding that it agreed with the activist that it was undervalued by markets.
Back in 2016, Western Digital spent $19 billion to acquire SanDisk in a deal designed to help the company, already a major player in the traditional storage industry, expand into the fast-growing market of flash memory chips, which are used in smartphones and tablets.
But Elliott believes that transaction was misguided, saying none of the synergetic benefits touted at the time by Western Digital has materialized. It also noted that in recent years rivals have chosen one segment or the other in an effort to focus on a single market.
“By any objective measure, Western Digital has underperformed—operationally, financially and strategically—as a direct result of the challenges of operating two vastly different businesses as part of the same company,” said Elliott’s Cohn and Genrich.
In July 2019, Insightia’s Vulnerability module argued that Western Digital was susceptible to activism due to meager profitability, a lack of growth and long management tenures. Although the company’s vulnerability reduced in 2021, it has been rising again in recent months.
“An activist might instead suggest that the company launch a strategic review to consider selling assets or selling the entire firm to a larger peer or private equity fund than can better handle costs, competition, and fluctuating market conditions,” the 2019 analysis concluded.