When Bain Capital LLC stepped into the contested auction of Toshiba Corp.'s memory chip business, the Boston private equity firm brought plenty of backup.
U.S. tech companies Apple Inc. (AAPL) , Dell Technologies Capital, Kingston Technology Co., Seagate Technology plc (STX) ; South Korean chipmaker SK Hynix; and Tokyo tech group Hoya Corp. are joining Bain in the ¥2 trillion ($17.7 billion) bid to acquire Toshiba Memory Corp.
Japanese public-private business support group Innovation Network Corporation of Japan and the Development Bank of Japan Inc. may also invest. The group is fittingly named KK Pangea, in reference to the geological super-continent that existed before the continents split.
Should they complete the deal despite legal objections of Toshiba partner Western Digital Corp. (WDC) , the constituents can expect to reap different benefits.
Western Digital acquired a stake in the joint venture when it bought SanDisk Corp. for $19 billion in 2015. Toshiba was forced to explore a sale of the memory business earlier this year after its U.S. nuclear business sought Chapter 11 bankruptcy protection and larger-than-expected losses caused the company to warn that it might not continue as a going concern.
Western Digital argues that Toshiba does not have the right to sell interests in the venture. Western Digital is also not likely pleased to have competitors Seagate and SK Hynix acquire stakes in the business.
Bain has the typical goals of a financial sponsor, said Moody's Investors Service analyst Gerry Granovsky. The firm has experience backing large tech companies such as BMC Software Inc. and Symantec (SYMC) . Down the road the company could exit through an IPO. The group could sell the business back to Toshiba if the company is on firmer ground, or to Western Digital or another party.
For Apple, Dell and other tech companies, the deal provides access to the market for crucial NAND flash memory.
"As NAND goes into a lot more end uses -- in everything from cell phones to notebook computers to your basic USB drives, the micro SD drives in cameras and increasingly more into [devices for] the Internet of things where you need very quick small format storage -- there is a risk for someone like Apple and Dell that there is a shortage," Granovsky said.
"You effectively are either buying it on the spot market from the NAND developers or you have supply agreements, but those supply agreements are very short term," he added. "So you are going from production cycle to production cycle. You don't have a consistent set of output from somebody.
The major NAND producers include Samsung Electronics Co. Ltd (SSNLF) , Toshiba, SK Hynix, and a partnership between Micron Technology Inc. (MU) and Intel Corp. (INTC) , Granovsky noted. Apple might be apprehensive if its supply depended on Samsung, a rival in phones, tablets and computers.
"By being part of the consortium, you don't care about getting voting stakes, you don't care about the longer-term economics of monetizing this investment, which is Bain's rationale for being there," he said. "You want to have that steady supply of the memory component."
Chipmaker Sk Hynix comes to the deal from a different perspective. "Since they produce their own NAND they don't need that capacity," Granovksy said. "They are a direct competitor to Toshiba memory and they are the industry laggard right now."
Reports suggest that SK Hynix will have limited voting rights and will not have access to Toshiba's technology. The chipmaker may benefit by keeping Toshiba's NAND business out of the hands of Western Digital or Apple supplier Foxconn, formally known as Hon Hai Precision Industry.
Japanese parties Hoya Group, Innovation Network Corporation and Development Bank of Japan have separate considerations. Innovation Network and Development Bank have are not yet formally part of the group, though the consortium said that the two have expressed interest in joining. "The incentive for the Japanese government-related and industry-related groups is to make sure that this critical technology stays in Japan," Granovsky said. "The last thing they wanted is Foxconn getting in there because that's what everyone is afraid of -- the leakage of tech to China."
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