Toshiba Corp., seeking to make up for a huge write-down in its nuclear-equipment unit, finally took the drastic step of putting its crown jewel — its chip business — up for sale. Finding a buyer might prove to be even more difficult.
The Tokyo-based conglomerate had been entertaining offers for a minor stake in the flash-memory operations, until it booked a $6.3 billion write-down in its nuclear unit this week. President Satoshi Tsunakawa said he’s now open to selling a majority share or even the entire division to repair the company’s balance sheet. The search for a buyer is likely to last beyond Toshiba’s earlier March 31 deadline for the deal, a person familiar with the matter said.
For competitors SK Hynix Inc., Western Digital Corp. and Micron Technology Inc., buying Toshiba’s business would represent a rare opportunity to close the gap with market leader Samsung Electronics Co. Demand for flash, or NAND, memory is still robust because it’s the main storage in the more than 1 billion smartphones sold every year, and it’s increasingly being used in data centers to house the flood of data created as computing shifts to the cloud.
“Toshiba finally recognized the reality that whoever is going to invest in the NAND business is going to want a majority of it,” said Zuhair Khan, an analyst at Jefferies in Tokyo.
Any prospective buyer of Toshiba’s chip business would have to clear a number of hurdles, including being able to pony up as much as $14 billion, antitrust considerations and the Japanese government’s reluctance to lose a key technology.
The government is closely watching developments at Toshiba and considers flash-memory a technology that is “extremely important” to the nation’s growth strategy, a top official said this week. It’s a familiar line in a country that over the past few decades has seen its dominant position in semiconductors and flat panels pass to South Korean and Taiwanese rivals.
Toshiba, Hitachi Ltd., Mitsubishi Electric Corp. and NEC Corp. took away the market for computer memory from Intel Corp., International Business Machines Corp., and other U.S. companies in the late 1970s. That memory-chip business then became the foundation of Samsung’s rise to become a global electronics giant in the 1980s and 1990s, when it successfully mimicked its neighbor’s concentration on improving production and eventually overtook competitors.
While Taiwanese latecomers struggled in memory, Taiwan Semiconductor Manufacturing Co. pioneered chip outsourcing and put pressure on the nonmemory businesses of Japanese companies, which heavily focused on the needs of the groups that owned them and were late to look for a broader customer base.
Toshiba is the only Japanese manufacturer left that’s kept pace in the expensive race to build and maintain leading-edge chip-production facilities. With factories costing more than $5 billion to build and equip, market share is important in providing the volume of orders for the commodity chips that allow companies to get a return on their investment.
About a third of the $30 billion market for flash-memory chips is served by Samsung’s factories, close to the same amount as its next two rivals combined, giving it a huge advantage in costs and scale. Toshiba is second with about 20 percent, followed by its manufacturing partner Western Digital. Micron and Hynix have about 10 percent each.
Historically, Samsung has ignored opportunities to acquire and focused on building its own plants. The company’s already-dominant share in the market would also likely rule out the South Korean giant as a potential buyer. Hynix, on the other hand, would be an eager buyer with deep enough pockets for the deal, according to Greg Roh, an analyst at HMC Investment Securities Co. It has already offered to pay at least 2 trillion won ($1.8 billion) for a smaller stake, a person with direct knowledge of the matter said earlier this month.
“Hynix may really want Toshiba bad, because a wealthy Chinese company buying it would cause even a bigger headache,” said Song Myung-sup, an analyst at HI Investment & Securities Co. “The marriage would make Hynix even bigger than the industry leader Samsung in NAND chips.”
China has said it’s prepared to spend more than $100 billion building a domestic semiconductor industry that will give it the ability to serve its home market, the world’s largest. The country has seen several attempts to acquire U.S. assets rebuffed on regulatory concerns, but it remains determined to acquire expertise. Currently China doesn’t have locally owned plants capable of producing chips based on the most advanced manufacturing, a skill set that’s just as important as designing the circuitry.
Toshiba’s initial offer of only partial stakes of the chip unit may have been motivated by concern about losing control. Yet control is most likely what its rivals are interested in as they consider whether to make an approach. The cost of maintaining plants that otherwise would quickly become obsolete is the first demand on most chipmakers’ balance sheets. Without that or guaranteed supply at a low price from Toshiba, they’re just propping up a rival that can hurt them.
Micron has been building scale through joint ventures and a string of acquisitions of the assets of rivals who have struggled to keep up with the spending requirements.
In 2013 the U.S. company paid $2.4 billion to buy Japanese computer-memory maker Elpida.
Those acquisitions have come at a cost. Micron had about $10 billion of debt compared with cash and investments of $4.3 billion at the end of its most recent quarter.
Chief Financial Officer Ernie Maddock told investors at a recent meeting that the company’s priority was on paying down that debt load.
Micron would also be a tough choice for Toshiba. While acquisitive, the U.S. company has typically waited until targets have run out of money and been desperate to sell. It’s also shown a willingness to walk away at the last moment if it doesn’t get what it wants, such as in 2002, when it ended negotiations to acquire Hynix Semiconductor.
Unlike Micron, Western Digital is already a partner with Toshiba through partial joint-venture ownership of some of the Japanese company’s chip facilities, acquired via its purchase of SanDisk Corp. last year. That $12 billion transaction, aimed at bringing in chips that are the future of storage technology, left Western Digital saddled with $13.3 billion of debt. It had $5.2 billion of cash and cash equivalents at the end of its most recent quarter.
IN FIVE EASY PIECES WITH TAKE 5