Toshiba is said to be keen on the proposal from KKR and Innovation Network Corp of Japan. Source: Reuters/Toru Hanai

Bidders line up to acquire Toshiba’s chip business as second-round bids close

By Tech Wire Asia | 22 May, 2017

THE Toshiba drama continues: Two American bidders emerge as the frontrunners to claim Toshiba Corp.’s valuable semiconductor unit as of Friday, Broadcom Ltd. and a coalition led by KKR & Co., according to sources speaking to Bloomberg.

The news of the filing, which emerged after today’s second-round deadline, is followed closely by news that yet another American firm, Bain Capital LP., is planning a total buy-out of the company, in partnership with South Korean SK Hynix, whose involvement has dipped in and out of the narrative for months now.

Toshiba down more than 12%, eyes biggest drop in four months: Toshiba shares are on track for their biggest one-day… https://t.co/IDINghBVwz
— BSIC (@BSICBocconi) May 16, 2017

According to Reuters, Bain plans to offer Toshiba JPY1.5 trillion (US$13.5 billion) for a 51 percent majority stake, while SK Hynix would stay out of a leading role due to anti-trust concerns. Bain has also sweetened the deal by offering Toshiba and the chip-unit’s current management team to own a portion of the company’s stakes in order to ensure the business’s growth.

In comparison, Broadcom and the coalition’s offers are much higher, coming in at about JPY2.2 trillion (US$20 billion) and JPY1.8 trillion (US$16.1 billion) respectively. San Jose-based Broadcom has argued their offer would largely smooth out any regulatory scrutiny that might descend upon them, while the Japanese coalition has boasted of the support they would inevitably receive from the country’s government, who by all accounts is interested in keeping the business in the family, so to speak.

The KKR-led coalition may also gain some support from Western Digital Corp., Toshiba’s partner in its semiconductor business, who is currently negotiating a possible link-up with the Japan-based group. Western Digital (WD) and Toshiba have been locked in an embittered spat over the sale of the chip business, further underscored by WD’s desire for a controlling stake though they have only been offered a 20 percent stake, according to anonymous Bloomberg sources.

The internal rattle between WD and Toshiba has caused some significant problems in the deal’s movements, as WD has accused Toshiba of unilaterally trying to sell the business. The two companies co-own a lynchpin Yokkaichi factory in the Japanese memory chip business. WD has argued they have the exclusive rights to negotiate any sell-off, though Toshiba has refuted those claims, as WD only became a partner after the company acquired SanDisc Corp in 2016.

As of now, WD has filed for arbitration, which could drag out the proceedings for Toshiba, who is still locked in crisis-mode after the bankruptcy of its Westinghouse nuclear unit plunged the company deep into debt. For now, Japan’s Economy, Trade and Industry Ministry has advised the two disputing factions to work out a compromise, though the governmental agency has lately decided to get involved by helping to organize the KKR-led coalition.

California-based Western Digital is a long-standing joint venture partner in Toshiba’s main semiconductor plant in Japan. Source: Shutterstock

Other parties in the KKR-led group include the Development Bank of Japan, as well as the state-backed Innovation Corporation of Japan (INCJ), which many commentators suggest may be the ultimate decider of the successful bidder.

“Whoever INCJ decides to go with, is likely to be the winner, regardless of the size of the bid,” said Damian Thong, an analyst at Macquarie Group Ltd. to Bloomberg. “A larger bid that doesn’t have INCJ in it, is unlikely to be successful.”

Western Digital themselves might make an offer on its own, some sources say, though their first-round bid was woefully weaker than its rivals. Whatever happens though, time is of the essence for Toshiba, who last week delayed their earnings 2016 report for the third time since January, spelling real trouble for the Japanese conglomerate. The company now has until June to declare their earnings, or else face possible delisting from the Tokyo Stock Exchange.

That being said, the sale of the chip business could be the boon the company needs to rise from the ashes. The company’s stock surged 5.6 percent in the last round of trading, riding global demand for semiconductors and memory chips. The specific type of flash memory chip that Toshiba’s business produces is enjoying a particularly good year due to rising manufacturing of smartphones and IoT devices.

Other companies such as Samsung Electonics Co., Hynix and Micron Technology Inc. have all enjoyed similarly strong earnings as the global technology industry moves towards chip-based storage options.