Tuesday, April 26, 2016

Western Digital Corp (WDC) Stock Is a Solid Long-Term Value Play

WDC, SNDK have synergies that will benefit both in the long-term

Western Digital Corp (WDC) has been on the slide for about a month now, not long after it got the green light for its planned acquisition of SanDisk Corporation (SNDK), which had been in the works since October of last year.

Originally, the deal was expected to cost WDC an estimated $19 billion, but that figure was reduced to $17 billion after the withdrawal of Unisplendour, a Chinese electronics manufacturer, which had previously agreed to acquire a 15% stake in WDC valued at nearly $4 billion.

Still, both Western Digital and SanDisk, as well as WDC and SNDK shareholders, stand to benefit immensely in the long run.

Benefits for Western Digital


WDC has long been a leader in the hard drive industry, battling for market dominance against its closest competitor Seagate Technology PLC (STX). Both companies have struggled with declining revenue in the face of a massive paradigm shift away from traditional hard drives to solid-state drives and flash memory storage.

Merging with SanDisk will allow WDC to benefit from SNDK’s position as a top player in the SSD and flash memory storage arena. Synergy of both products and revenues will help Western Digital advance its position in enterprise markets with a new product portfolio that is broader and more comprehensive than ever before.

Access to SanDisk’s current product lineup, as well as its chip manufacturing facilities and foundries, will allow Western Digital to reduce operating expenses by more than $180 million over the next year-and-a-half by shedding redundant products and eliminating poorer-performing facilities.

Benefits for SanDisk


For the past year, SNDK has struggled to gain momentum. Shares of SanDisk stock were caught in a clear downtrend, off 50% in a year, before Western Digital swooped in.

Battling tech behemoths Samsung Electronic (SSNLF) and Micron Technology, Inc. (MU) for dominance in the flash memory arena, SanDisk hasn’t fared too well. Much of that is due to steadily declining prices of solid-state drives, a trend that’s expected to continue for at least the next few years.

Merging with Western Digital gives SanDisk access to more significant resources that can be used to stave off the competitiion and reduce overall SSD production costs. Lower manufacturing costs would translate into easier sales and increased OEM contracts for SanDisk SSDs in consumer laptops.

Bottom Line for Western Digital and SanDisk Merger


WDC management believes that merging with SanDisk will ultimately result in cost synergies of more than $1 billion by the year 2020. Assuming that SNDK continues to manufacture top-quality cutting-edge SSD and flash memory products, competing against the likes of Micron and Samsung should be a much easier prospect.

Plus, despite decreasing demand for traditional hard drives in the U.S. and Europe, the technological capabilities of emerging markets around the world should keep Western Digital humming along like a well-oiled machine.

Granted, none of this will show up this week when Western Digital reports earnings (for the record, WDC will post its numbers Thursday after the bell).

But the merger between Western Digital and SanDisk makes WDC stock a great long-term value play — especially considering that the plethora of benefits to both companies will become slowly evident in the coming years, further strengthening the company as a whole.

Article originally appeared on InvestorPlace (04/26/2016)