Sources: Stalled merger talks between Western Digital and Japanese company Kioxia

TOKYO (Reuters) – Merger talks between Western Digital (WDC.O) and Japan’s Kioxia Holdings have stalled, as opposition from Kioxia investor SK Hynix complicated the stalled deal to once again create the memory chip giant, two sources said on Friday.

South Korea’s SK Hynix (000660.KS), a major memory chip maker and competitor to both companies, said on Thursday that it did not support the deal, citing the potential impact on the value of its investment in Kioxia.

One person familiar with the matter said that opposition effectively froze the deal. The two people also cited a failure to agree on terms.

Western Digital shares fell 9.3% on the news.

It was not immediately clear whether the merger would ultimately be canceled or whether it could be revived.

Kioxia declined to comment. Western Digital and Bain Capital did not respond to Reuters’ requests for comment.

Both Western Digital and Kioxia remained eager to consummate the relationship, according to the people and two others familiar with the talks. Merger talks between chip heavyweights have stalled since 2021.

Representatives of both Western Digital and Kioxia, formerly known as Toshiba Memory, were working on the sidelines to overcome the difficulties, three of the people said. That included an attempt to win over Hynix, one of the people said.

All people declined to reveal their identities because the information has not been made public.

The Nikkei Economic Daily, which was first to report news of the cancellation of the talks, said the two companies were also unable to agree on terms with Bain Capital, Kioxia’s largest shareholder.

The combined company would control a third of the global NAND flash market, on par with top-tier Samsung Electronics (005930.KS), threatening the position of Hynix, the world’s No. 3 maker of NAND flash memory.

Antitrust issues

Asked about the cancellation, Japanese Industry and Trade Minister Yasutoshi Nishimura told reporters that the government will monitor the situation and continue to support Kioxia as an important manufacturer of advanced chips.

The two companies were seeking to merge in the face of a global chip glut and weak demand for flash memory chips, which increased pressure on chip manufacturers to merge.

Since merger talks first began two years ago, Kioxia and Western Digital’s negotiations have often been bogged down by a number of issues, including valuation discrepancies. There are also concerns about potential antitrust issues, with Chinese regulators posing a major hurdle.

Mark Miller, an analyst at Benchmark, said the merger would have given the two companies “an opportunity to reduce costs and be more effective competitors in the market.”

He added: “But completing the deal was very complicated. I am not sure that China will agree to the deal either.”

The companies announced a combined loss of about $1.4 billion in their latest quarterly reports.

Last year, Western Digital launched a review of strategic alternatives, after activist Elliott Investment Management revealed a nearly $1 billion stake in the company and pushed to spin off those companies.

Reuters reported last week that major Japanese banks were set to commit 1.9 trillion yen ($12.63 billion) in financing to support the merger.

SK Hynix invested 395 billion yen in Kioxia in 2018 as a member of a consortium led by Bain that bought the Japanese company from Toshiba (6502.T) for 2 trillion yen. It holds convertible bonds that can be converted into an ownership stake of up to 15% in Kioxia and its approval was one of the preconditions for the merger.

($1 = 150.4200 yen)

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