Chipmaker SK Hynix opposes the merger between Kioxia and Western Digital

Chipmaker SK Hynix opposes the merger between Kioxia and Western Digital

South Korean memory chipmaker SK Hynix has announced its opposition to the proposed merger of Kioxia and Western Digital, which presents a setback to Bain Capital’s efforts to establish a US-Japan semiconductor leader.

SK Hynix had invested approximately $3.5 billion in the consortium led by Bain, which acquired Toshiba’s semiconductor division, subsequently rebranded as Kioxia, for $18 billion in 2018. The merger between Kioxia and Western Digital cannot move forward without the approval of the South Korean company. This complicates Bain’s exit from what was the largest buyout in Japan by a private equity group.

SK Hynix, a prominent manufacturer of memory chips worldwide, has expressed concerns that the proposed merger could pose a challenge to its position in the Nand memory sector.

The company’s Chief Financial Officer, Kim Woo-hyun, stated during a conference call with analysts on Thursday, “We are not agreeing to the merger at this time due to the potential impact on the value of our investment assets. However, we will make a decision that considers all stakeholders, including Kioxia as well as our shareholders.”

The proposed merger also necessitates approval from various countries, including the US, China, and South Korea.

According to James Lim, an analyst at the US hedge fund Dalton Investments, “SK Hynix is reluctant to witness the emergence of a more formidable competitor. The combined entity’s market share would be twice that of SK Hynix.”

Chipmaker SK Hynix opposes the merger between Kioxia and Western Digital

Bain Capital had postponed its plans to list Kioxia in 2020 due to the impact of the Covid-19 pandemic and the geopolitical uncertainties arising from deteriorating US-China relations.

Although listing Kioxia would have provided an exit strategy for the South Korean group, sources close to the Japanese chipmaker indicated that the recent decline in the memory sector and ongoing losses have currently made this option unviable.

Kioxia refrained from commenting on discussions with Western Digital but mentioned its intention to pursue an initial public offering at a suitable time. Bain and Western Digital have not yet responded to requests for comment.

Certain analysts have proposed that SK Hynix might be swayed to endorse the merger as a means of obtaining an infusion of capital. This is seen as a potential remedy for the substantial losses the South Korean company has endured over the past year due to a decline in global demand for memory chips.

SK Hynix had reported losses of $2.5 billion and $2.1 billion in the first and second quarters of 2023, respectively. The company’s third-quarter losses decreased to $1.3 billion, with its executives anticipating a recovery in the memory chip market next year.

SK Hynix has also received a boost from robust demand for its most recent iterations of “high bandwidth memory” chips, which are essential components in the systems required for training artificial intelligence models like OpenAI’s ChatGPT.

Park Myoung-soo, the company’s Head of DRAM Marketing, informed analysts during a conference call that “We are sold out on next year’s capacity for HBM3 and HBM3E chips combined.”

James Lim, the analyst from Dalton Investments, noted that the investment in Kioxia held strategic significance for SK Hynix. It allowed SK Hynix to prevent a key competitor from falling into the hands of rivals and secured a veto right that could be used to influence consolidation in the Nand market in line with its interests.

However, Lim also mentioned that SK Hynix might find itself in a situation where it needs to make compromises. In such a scenario, the company would leverage its veto power to negotiate the best possible terms. He added that the structure of the Bain deal prevented SK Hynix from accessing Kioxia’s technology.

Western Digital Corp and Japan’s Kioxia Holdings have terminated discussions to create one of the world’s largest chipmakers, as reported by the Nikkei newspaper on Thursday. The U.S.-based company informed Kioxia earlier in the day that it would withdraw from the negotiations after the merger failed to gain approval from SK Hynix, an indirect shareholder in Kioxia, according to the newspaper’s sources. Additionally, the companies couldn’t reach an agreement on terms with top Kioxia shareholder Bain Capital.

The proposed merger, combining their flash memory businesses, would have given them a significant share in the global NAND flash market, comparable to the top player, Samsung Electronics. This could have posed a challenge to South Korean SK Hynix, the third-largest maker of NAND flash memory globally.

Western Digital, Kioxia, and Bain Capital have not yet responded to requests for comments from Reuters. Following the news, Western Digital’s shares plummeted by 12%.

These merger talks were taking place in the midst of a global chip oversupply and weak demand for flash memory chips, which had increased pressure on chipmakers to explore consolidation. Discussions between Kioxia and Western Digital had been ongoing since 2021 but faced repeated stalls due to various issues, including disparities in valuation.

 

 

 

 

 

 

( Source: Financial times )