China group dumps Western Digital investment

In the second setback to a U.S. acquisition by Chinese investors in a week, a Chinese investment group has ended its proposed $3.78 billion investment in Western Digital.

The move, announced Tuesday by Western Digital, complicates but doesn’t end the Irvine storage company’s proposed $19 billion acquisition of Milpitas flash memory maker SanDisk, which was announced in October. That deal, which now must be approved by shareholders, will close in the second quarter of this year.

The decision by Unisplendour and Unis Union Information System of China follows on the heels of a decision last week by Fairchild Semiconductor to spurn a higher offer from China Resources Microelectronics and Hua Capital Management of China for one from ON Semiconductor of Phoenix. That move also was prompted by concerns that U.S. approval would be difficult to obtain.

Unisplendour’s parent company, Tsinghua Unigroup, is a key part of China’s drive to become a major player in the global semiconductor industry, through innovation, investment and acquisitions.

Western Digital, an Irvine computer storage company, said the decision by Unis Union to end its investment follows a review by the Committee on Foreign Investment in the U.S. CFIUS is an intergovernmental body that reviews proposed sales of American companies to foreign entities.

CFIUS had notified that it was investigating the proposed investment under the Exon-Florio Amendment to the Defense Production Act, which triggered a 15-day period during which either Western Digital or Unis Union could terminate the agreement.

Congressional concern has mounted over a string of Chinese acquisitions of U.S. tech companies, a number of them based in Silicon Valley.

The review of the Western Digital share purchase may have been triggered more by the company’s intention to buy SanDisk than by WD’s hard drive technology, said industry analyst Patrick Moorhead of Moor Insights and Strategy. “For a spinning disk you get the highest amount of capacity, but not the highest amount of performance. For that you go to a flash drive like SanDisk’s,” Moorhead said.

He said WD is one of only three companies that make hard drives – the others are Seagate and Toshiba – so that could have been an issue. But Sandisk is working on a super-fast advanced form of flash memory that may have caught attention of the government committee.

“There are special things you can do with the new type of flash that SanDisk is working on,” Moorhead said. Intel and Micron have teamed up for their on super-fast flash memory project.

Derek Scissors, a China trade expert with the American Enterprise Institute, said that the Chinese investors simply may have been unwilling to go through an extensive CFIUS review. “These companies aren’t used to the level of transparency they have to deal with. I think what happens is that the Chinese get advice from sonmeone saying CFIUS won’t be a problem, and in most cases that’s true. But for 15 percent of Western Digital, there is going to be serious CIFIUS review.”

The investment would have given the Chinese investors a 15 percent share of the Irvine-based storage firm and a seat on its board, and Western Digital money to use for acquisitions.

Western Digital said that it will move ahead with the SanDisk deal under different arrangements. WD shareholders will receive an “alternate merger consideration,” the company said. “Western Digital believes the combination is compelling and will create significant value for its shareholders,” it said.

“We continue to look forward to our transformational combination with SanDisk and capitalizing on the growth opportunities ahead of us as the demand for data storage continues to increase, despite the inability to carry out the equity investment by Unis,” said Steve Milligan, Western Digital CEO.

A joint venture agreement between Unis Union and Western Digital announced last year remains in place, the Irvine storage company said.

Western Digital shares were down nearly 6.5 percent to $43.13 in midday trading.

Photo: Hard drives on display at Western Digital’s hard-drive manufacturing operation in Fremont, Thursday, August 1, 2013. (Patrick Tehan/Bay Area News Group)

 

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