Shares of Western Digital Corp. were rocketing in Tuesday trading after Elliott Investment Management issued a call for the chip company to fully separate its flash and hard-disk-drive businesses and offered at least $1 billion in additional funds to help facilitate such a split.
Elliott argued in a letter to Western Digital’s
board of directors that the company failed to deliver the expected benefits from its 2016 merger with SanDisk that gave it a strong foothold in flash memory, saying that Western Digital has “underperformed—operationally, financially and strategically” as a result of operating the two “vastly different businesses.”
Western Digital shares were up 14.6% in Tuesday morning trading and on track for their largest single-day percentage gain since March 24, 2020, when they rose 17.8%.
Though Western Digital reorganized itself several years back to place the hard-disk-drive and NAND flash businesses in separate units, Elliott said that the company needs to do more to fully realize the value of its assets.
“Western Digital’s current valuation makes clear that the investment community has not been persuaded that this necessary-but-insufficient step has solved the problem,” Elliott said in the letter.
In Elliott’s view, a full split of the flash business could help Western Digital’s stock reach a price upwards of $100 a share by the end of 2023. The stock closed Monday at $53.92, prior to Elliott’s call for a separation.
“We agree that Western Digital is an excellent, yet undervalued, company with strong positions in our flash and HDD businesses and look forward to engaging with Elliott to discuss their views,” a Western Digital spokesperson told MarketWatch. “Our Board of Directors is committed to acting in the best interests of all our shareholders and will carefully consider Elliott’s ideas.”
Elliott said that it has invested about $1 billion in Western Digital, amounting to over 6% of the company, and it offered a further investment to help make a business separation happen. Elliott announced that it would put at least $1 billion of incremental equity capital into the flash business at a $17 billion to $20 billion enterprise value either to help enact a spinoff transaction or serve as equity financing for a sale or merger.
The investment-management company asked Western Digital’s board to undergo a “full strategic review” of the proposal.
“We view Elliott’s offer as a validation of our view that there should not be a significant disparity on the valuation of Seagate
and Western Digital’s HDD business (not considering Seagate’s capital return) and that the company’s flash business is undervalued,” Wells Fargo analyst Aaron Rakers wrote in a Tuesday note to clients.
Prior to Tuesday’s rally, Western Digital’s stock had tumbled 23.7% over the past 12 months, while Seagate shares had lost 11.2% and the S&P 500 index
had inched 0.6% lower over the same time.
Evercore ISI’s C.J. Muse wrote that he and his team “readily agree with Elliott that WDC is seriously undervalued and that the company has not achieved the strategic benefits since acquiring SanDisk in 2016,” though they weren’t sold that a spinoff was the right course of action.
“[H]erein lies the conundrum – the DRAM industry re-rated (to some degree) post-consolidation to 3 large players, whereas today there are 5 large players in NAND (SEC, Kioxia, WDC, Hynix, MU),” the Evercore team wrote. ” We believe the re-rating for the NAND industry comes after consolidation, not necessarily before. So we aren’t sure a spinout makes any sense.”
Western Digital is due to host an analyst day May 10, and Baird analyst Tristan Gerra is curious to hear any commentary from the company on its existing structure. It has previously pointed to synergy benefits between the two businesses, he said.