Tuesday, April 04, 2017

Big Tech Goes to War Over Toshiba Corp (TOSBF) Flash Memory

While Toshiba drowns in debt, sharks are circling the water

Last week, shareholders of Toshiba Corp (USA) (OTCMKTS:TOSBF) voted to approve the separation of the company’s NAND flash memory business, with the intention of attracting outside companies and initiating what amounts to, essentially, an auction of its most valuable asset.

In early February, Barron’s reported that Toshiba execs were apparently considering the sale of the NAND business to offset the company’s debt. At the time, “Toshiba’s equity [had] dropped to negative $1.7 billion, so it needs to come up with at least that much cash to stay afloat.”

That negative equity was the result of a $6.3 billion write-down, which apparently stemmed from “accounting regularities” and “overstated profits” of more than $1.2 billion and ultimately led to the resignation of the company’s chairman.

Initially, Toshiba attempted to auction off a 20% stake in its NAND business, but nothing came of that, likely because “the serious proposals probably all required the investor to get majority control of the business.”

With no alternative options, the proposal to completely sever and sell the flash memory business was put to a vote, with more than two-thirds of shareholders approving the proposal.

International Ramifications of Toshiba’s NAND Flash Memory

Toshiba’s NAND flash memory business has been described as the company’s crown jewel, and rightly so. In 1984, Toshiba invented flash memory and in 1989 released NAND flash memory chips. Simply put, NAND flash memory is “non-volatile storage technology that does not require power to retain data.” This technology has become the international standard for temporary data storage (i.e., USB thumb drives, MP3 players and other devices where files are frequently overwritten).

Since offering a 20% stake in the business didn’t yield any viable bids, the company seemingly has no choice but to sell the entire unit. With flash memory being one of the largest pieces of technology found in everything from smartphones to automobiles to modern kitchen appliances, the owner of that business will have immediate influence on the global flash memory market. This thesis is supported by estimates from Nomura, which indicate that “global NAND sales could increase 51.2% year over year to $51 billion in 2017.”

The List of Bidders Is Huge

As you can imagine, the number of companies that would love nothing more than to get their hands on Toshiba’s NAND business is massive. Companies from across the globe have lined up, with bids coming from private investors, investment funds, other chipmakers, as well as a number of tech behemoths.

According to Business Insider, there are currently about 10 potential bidders interested in Toshiba’s NAND business, including the Japanese government itself, South Korean chipmaker SK Hynix, Broadcom Ltd (NASDAQ:AVGO), Western Digital Corp (NASDAQ:WDC), Micron Technology, Inc. (NASDAQ:MU), Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).

Not all of the bids have been made public, but it was reported that Broadcom offered approximately $18 billion, which is “at the high end of the expected range of $13 billion to $18 billion for Toshiba’s chip unit.”

Acquiring Toshiba’s flash memory business will allow the winning bidder to either design and manufacture its own memory chips, or gain influence — and profit — from the existing international ecosystem.

For example, Apple would gain the ability to create better memory units with increased storage capacity for future iterations of the iPhone and iPad. GOOGL and AMZN would be able to “reduce their dependence on external chip makers and ensure supply for their own data servers through in-house manufacturing.”

Existing chipmakers such as MU would gain “an immediate impact on pricing,” as well as increased market share.

Micron would have a chance to become the sole provider of NAND flash memory to companies such as Western Digital. Further, MU would have significant influence that could threaten WDC’s current advantage in the chip market.

For Western Digital, however, Market Realist explains that:
“WDC would benefit only if a Japanese company, a financial company, or a customer like Canon, Foxconn, or Apple (AAPL) acquires Toshiba’s share. These companies—individually or in a consortium—would be silent partners and provide the necessary funding to build the new fab and maintain the other fabs.”

What This Means for Investors

Currently, this entire debacle regarding Toshiba and the sale of its NAND flash memory business is difficult to use to any real advantage. This is simply because there’s too much still left up in the air, and until a deal is finally announced there’s not much to work with.

There is, however, significant potential for volatility and upset in the technology sector, specifically the companies involved in making memory chips, as well as those that rely heavily on those components. That list is massive, and the fallout from the sale of Toshiba’s NAND unit has the potential to shake up more than a few existing business relationships.

So for shareholders of the major players currently involved in the bidding, the only thing to do is hurry up and wait. But keep an extremely close eye on how this story unfolds, as share prices are likely to change rather quickly — even if those spikes or slumps are short lived and reactionary.

Article originally published on InvestorPlace (04/04/2017)

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