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Micron, Western Digital Surge on Reported Look at Memory Chipmaker Kioxia

Credit Suisse analyst John Pitzer says a deal for flash memory maker Kioxia could be worth $30 billion following a WSJ report of interest from Micron and Western Digital.

Micron Technology  (MU) - Get Micron Technology Inc. Report shares leapt higher Thursday, with similar gains for rival Western Digital  (WDC) - Get Western Digital Corporation Report, after the Wall Street Journal reported the chipmaking pair may be individually looking to purchase Japan-based flash memory group Kioxia Holdings Corp.

Micron shares were also supported by stronger-than-expected second quarter earnings of 98 cents per share and a current quarter revenue forecast of $7.1 billion posted after the close of trading last night.

Kioxia Holdings, which is jointly-owned by Toshiba Corp and a consortium lead by private equity group Bain Capital, was once the target of Western Digital's interest when it operated as Toshiba Memory in 2017.

Toshiba sold the lucrative flash memory business in 2018 for around $18 billion in order to cover costs associated with the collapse of its U.S nuclear division, Westinghouse, and its subsequent Chapter 11 bankruptcy filing, but the process was plagued by delays linked to the company's financial statements and a request by Western Digital to the International Court of Arbitration to block the sale.

Since then, IPO plans that would have valued Kioxia at more than $20 billion have been scrapped -- although Bloomberg reported Thursday that this is still an option for the Bain-backed group -- amid the market upheaval triggered by the coronavirus pandemic and the subsequent shortage in global semiconductor supply chains that followed.  

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Multiple regulatory hurdles -- many of which prevented Western Digital from acquiring Toshiba Memory in the first place -- would need to be cleared before any deal could be finalized, with sign-offs needed from both the Japanese government and authorities in Beijing. 

Western Digital also remains in a joint venture with Kioxia as part of its legacy partnership with Toshiba in the flash-memory business, which goes back more than 3 decades. 

Micron shares were marked 6.4% higher in early trading Thursday to change hands at $93.80 each, a move that would extend the stock's six-month gain to around 91%. Western Digital shares, which are up around 85% over the past six months, jumped 6.5% to $71.00 each.

"While the outlook for NAND (flash memory) up-ticked in the group's second quarter, Micron still argues for constrained Industry CapEx," said Credit Suisse analyst John Pitzer. "A Kioxia merger would drive much needed industry consolidation – Micron is around 11% of the NAND market today, Kioxia is around 30% inclusive of its WDC joint venture and around 15% stand-alone."

"While JV constraints and regulatory issues are difficult to handicap – consolidation would be positive," he added. A back-of-the-envelop accretion math suggests a Micron/ Kioxia all-stock deal at $30 billion, including debt."