Calls for Full Strategic Review, Separation of
Flash Business
Sees $100+ per Share by 2023, ~100% Potential
Upside
Offers $1+ Billion of Incremental Equity
Capital to Facilitate Separation
Full Letter Available at ElliottLetters.com/WesternDigital
WEST
PALM BEACH, Fla., May 3, 2022
/PRNewswire/ -- Elliott Investment Management L.P. ("Elliott"),
which manages funds that have an approximately $1 billion investment in Western Digital
Corporation (NASDAQ: WDC) (the "Company" or "Western Digital"),
today sent a letter to the Board of Directors of Western Digital.
The letter called on the Board to conduct a full strategic review
of the value that could be created by separating its two vastly
different businesses, hard disk drives ("HDD") and NAND flash
memory ("Flash").
![HDD Revenues By Application, $bn and HDD Revenue Market Share, % HDD Revenues By Application, $bn and HDD Revenue Market Share, %](https://mma.prnewswire.com/media/1809643/1_HDD_Revenues_By_Application.jpg)
According to the letter, Western Digital has
underperformed—operationally, financially and strategically—as a
direct result of the challenges of operating both the HDD and
Flash businesses as part of the same company. In its letter,
Elliott argued that a full separation of the Flash business would
allow both HDD and Flash to be more successful while also unlocking
significant value. By executing on a separation, Elliott believes
Western Digital's stock price could reach $100+ per share by the
end of 2023, representing uniquely attractive upside of
approximately 100%.
In addition to its public investment in Western Digital, Elliott
is also offering $1+ billion of incremental equity capital into the
Flash business at an enterprise value of $17 to $20 billion
(a valuation close to the Company's entire current enterprise
value), to be utilized either in a spin-off transaction or as
equity financing in a sale or merger with a strategic partner. This
investment proposal underscores Elliott's conviction on the merits
of a separation.
The letter can be downloaded at ElliottLetters.com/WesternDigital.
The full text of the letter follows:
May 3, 2022
Western Digital Corporation
5601 Great Oaks Parkway
San Jose, CA 95119
Dear Members of the Board:
We are writing to you on behalf of Elliott Associates, L.P. and
Elliott International, L.P. (together, "Elliott" or "we"), which
have an investment of approximately $1
billion and representing over 6% of Western Digital
Corporation (the "Company" or "Western Digital"), making us one of
the Company's largest investors.
Western Digital serves a critical role in providing fundamental
technology to support the ongoing growth of data in two
market-leading franchises—hard disk drives ("HDD") and NAND flash
memory ("Flash"). In the HDD market, Western Digital has a strong
competitive position as the #2 player in an industry that today
represents a compelling opportunity, as the demand for near-line
HDDs has come to outweigh the steady decline in client PC HDDs. In
the Flash market, Western Digital's successful partnership with
Kioxia provides technology leadership and important scale benefits
as Flash continues its long-term, secular growth.
It has been nearly six years since these two businesses came
together through the $19 billion
acquisition of SanDisk in 2016. The acquisition was nothing less
than transformative. With a single transaction, Western Digital
diversified its nearly five-decade business away from HDD and
became one of the largest Flash players in the industry. The stated
rationale for the deal was the expected synergistic effects of
combining a broad portfolio of technologies, improved strategic
positioning with customers and an enhanced financial profile.
Unfortunately for the Company and its shareholders, none of
these benefits have been realized. By any objective measure,
Western Digital has underperformed—operationally, financially and
strategically—as a direct result of the challenges of operating two
vastly different businesses as part of the same company. This
underperformance is particularly disappointing given the Company's
great potential in both businesses.
It is important to emphasize that Western Digital's
underperformance long predates CEO David
Goeckeler and his leadership team, nearly all of whom were
hired in 2020 or later. David and his team have steered the Company
through a challenging operating environment, and to their credit,
they made the important decision in September 2020 to separate the operations of HDD
and Flash into separate business units. While this separation was a
positive step, the hope that it would lead to better execution has
not materialized, and Western Digital's current valuation makes
clear that the investment community has not been persuaded that
this necessary-but-insufficient step has solved the problem.
We believe a full separation of the Flash business can allow
both HDD and Flash to be more successful and unlock significant
value. By executing on a separation, we believe Western Digital's
stock price could reach $100+ per share by the end of 2023,
representing uniquely attractive upside of approximately 100%.
In addition to our public investment in Western Digital, Elliott
is also offering $1+ billion of incremental equity capital into the
Flash business at an enterprise value of $17 to $20 billion
(a valuation close to the Company's entire current enterprise
value), which can be utilized either in a spin-off transaction or
as equity financing in a sale or merger with a strategic partner.
This investment proposal underscores our conviction on the merits
of a separation as well as our belief in the long-term prospects of
the Flash business.
Today, we are calling on the Board to conduct a full strategic
review of these ideas, confident in our view that a comprehensive,
independent exploration of the value potential will point
decisively toward a separation of HDD and Flash. Though the
majority of this Board and management team were not involved in the
SanDisk decision, it is nevertheless this Board's responsibility to
address current market realities and set the Company on the right
course. We are making our perspectives on these matters public, as
we want to be transparent and provide all constituents with the
opportunity to weigh in for the Board's consideration. At the same
time, our goal is to align with you and work closely with the
Company to determine the best path forward. To that end, we would
welcome a meeting at your convenience to discuss the vision
outlined in this letter.
Our letter today is organized as follows:
- Our Investment in Western Digital
- How We Got Here
- Western Digital's Strategic Scorecard
- Path to $100+ per Share
- Working Together
Our Investment in Western Digital
Founded in 1977, Elliott is an investment firm that today
manages approximately $51.5 billion
of capital for both institutional and individual investors. We are
a multi-strategy firm, and investing in the technology sector is
one of our most active and successful efforts. Within our
technology practice, our team has extensive experience investing in
enterprise technology, including prior successful investments
across the storage and computing industry. Our experience over the
last 15 years includes working with many of the largest companies
in this market, including Dell Technologies, EMC and NetApp. We
have also been highly active in other relevant areas, including
storage software (Commvault, Symantec/Veritas) and data-center
infrastructure (Switch, Ark Data
Centres).1 Our investing background
provided us with broad perspective and insight as we considered how
Western Digital must navigate a dynamic market
environment.
Elliott's approach to its investments is distinguished by its
intensive due diligence, and our efforts on Western Digital have
followed this same approach. We enlisted former executives,
industry experts, lawyers, accountants and consultants in an
exhaustive research process on the Company's strategic position and
growth opportunity, as well as considerations for a Flash
separation. We believe that this time- and resource-intensive
diligence effort has given us a thorough understanding of Western
Digital's history and prospects. Our considerable
technology-investing experience and comprehensive diligence have
informed our perspective that Western Digital is deeply undervalued
and that a separation of HDD and Flash is the right path
forward.
How We Got Here
With nearly $20 billion of
revenue, Western Digital is one of the largest providers of storage
components for data infrastructure globally. This end-market is
made especially attractive by a confluence of major technology
trends that are driving exponential growth in the amount of data
requiring storage. Western Digital, along with a small number of
competitors, serves a mission-critical role in the development and
manufacturing of these products for large enterprises, hyperscale
data centers, OEMs and individual consumers.
Over the course of five decades and multiple technological
evolutions—including the transition from tape drives to HDDs and
the evolving use-cases of HDDs and NAND flash memory—Western
Digital has built a highly successful HDD business and earned its
industry-leading role alongside Seagate Technology. But with the
advent of NAND flash memory, the HDD industry began a slow decline
in 2013 as desktop and notebook PCs transitioned toward NAND flash
solid-state drives (SSDs), drawn by the latter's superior speed
performance. By 2015, the HDD industry was in decline. Many
industry analysts predicted the eventual death of HDDs and that
Flash would become the prevailing storage medium in the computing
industry.
Against this backdrop, Western Digital announced its acquisition
of SanDisk for $19 billion in 2015 to
diversify its business away from HDDs and to enter the
higher-growth Flash industry. This monumental decision represented
an "all-in" bet on the synergy benefits of a combined HDD/Flash
portfolio—Western Digital was acquiring a $19 billion equity value company when its own
market cap was only $20 billion.
In the six years following the SanDisk acquisition, the HDD
industry rebounded and went through a critical change: Demand for
high-capacity HDDs ("near-line") from hyperscale data centers and
enterprise customers accelerated. As client PC HDDs continued to
decline, near-line became the dominant HDD category, and today
comprises more than half of the industry. This dramatic change has
led the HDD industry to become a growth market once again, and
Western Digital is one of the two dominant providers of this
technology.
See "HDD Revenues By Application, $bn and HDD Revenue Market
Share, %" image.
In the Flash industry, demand for SSDs has been robust, as
desktop/notebook PC penetration is approaching 75%, smartphones
have become ubiquitous and enterprise SSDs are the standard in
use-cases where high speed is required. In the last five years,
NAND flash has transitioned from 2D NAND to 3D NAND, and the
capital requirements for NAND semiconductor fabs have increased
substantially. Western Digital, through SanDisk's two-decade JV
relationship with Kioxia (formerly Toshiba Memory), enjoys
essential scale benefits as one of the largest combined investors
in NAND technology, resulting in the lowest cost per bit in the
industry. While NAND pricing can be volatile, the industry has
grown by more than 2x, from $32
billion in 2015 to more than $68
billion in 2021.
See "NAND Revenues By Application, $bn and NAND Revenue
Market Share, %" image.
When Western Digital acquired SanDisk, the articulated rationale
was the synergy benefit of a combined portfolio through technology
sharing, manufacturing best practices, distribution leverage and
customer intimacy. What is truly remarkable is that Western Digital
stands alone as the only company today that operates in both HDD
and NAND flash, at a time when the rest of the industry has made
the opposite bet. Seagate is #1 in HDD and has remained a pure-play
with no captive NAND manufacturing business. Toshiba sold its NAND
business to an investor group in 2017 (now known as Kioxia) and
today is the #3 player in HDD. Samsung is #1 in NAND and exited its
HDD business to Seagate in 2011. Micron and SK Hynix, both active
acquirers, have declined to enter the HDD business and have instead
focused on complementary DRAM and NAND technologies.
See "Competitive Landscape In Memory Sectors" image.
Western Digital's Strategic Scorecard
Our diligence affirmed that Western Digital operates in
attractive end-markets with admirable competitive positions in both
HDD and Flash. However, with the benefit of nearly six years of
performance since the acquisition of SanDisk, we can assess Western
Digital's track record operating as a combined HDD/Flash business.
We can see whether the strategic objectives of this
transformational decision were achieved. And we can determine
whether the Company and its shareholders have been rewarded along
the way.
Unfortunately, the conclusion from this evaluation is clear:
Western Digital has underperformed its strategic aspirations, and
investors' profound lack of confidence in the Company is evident in
the extraordinary discount at which they value its stock. In the
following section, we briefly review our assessment:
Strategic Initiatives
Over the last six years, Western Digital has attempted to
deliver on the strategic synergies of a combined HDD and Flash
portfolio. As we have highlighted earlier in this letter, we
believe Western Digital is well positioned in each of its markets.
Critically, however, we believe that ownership of HDD and Flash
together has not created tangible strategic benefits, but
rather significant detriment. The evidence over the last six
years of Western Digital's performance demonstrates that attempting
to manage highly complex, vertically integrated businesses such as
HDD and Flash together has resulted in execution missteps and
conflicting go-to-market approaches.
To start, we can look at the evolving market share during this
period: Western Digital has consistently lost share in HDD,
while Seagate, its pure-play competitor, has gained share.
In Flash, Western Digital has also lost share, as its bet on
leveraging the HDD combination has failed to yield any benefit. In
contrast, Seagate is #1 in HDD without a NAND business, and Samsung
is #1 in NAND after having sold its HDD business to Seagate a
decade ago.
In order to understand why this combination has not succeeded,
we can review several of the most heavily emphasized areas of
strategic benefit that Western Digital has articulated to defend
its strategy. The first is the concept of "customer intimacy,"
which suggests that Western Digital can foster deeper customer
relationships if its product portfolio is larger and it can sell
both HDDs and Flash SSDs to the same customer. This concept had the
potential to be most relevant and strategic for high-growth
data-center use-cases, in which customers buy both near-line HDDs
and enterprise SSDs. Western Digital has even argued that its
"competitive position within the data center is unrivaled, built on
the breadth of our product portfolio" and that the "ability to
offer both hard drive and flash-based solutions differentiates us
from our competitors."
Over the course of our diligence—and based on our customer
interviews and review of the actual results—we have concluded that
the customer-intimacy argument is dramatically overstated. Since
completing the SanDisk deal, Western Digital has failed to gain
market share in either near-line HDDs or enterprise
SSDs, nor is it #1 in either business, despite its status as the
only company with an integrated portfolio. And finally, Western
Digital has publicly and frequently conceded that its enterprise
SSD efforts have disappointed for years, despite having previously
claimed that this area represented the most exciting growth
opportunity from the SanDisk acquisition. At the "Benefits of
Developing Flash and Hard Drive Technology" event last year,
Western Digital admitted "a very difficult period with respect to
our enterprise SSD products."
See "Capacity Optimized HDD Revenue Market Share, % and
Enterprise SSD Revenue Market Share, %" image.
The second area of strategic benefit that Western Digital has
frequently highlighted has been its ability to "move up the stack"
and offer customers integrated solutions rather than underlying
storage components. Western Digital has referred to this category
as "data center solutions" and has promised significant growth and
opportunity in an area where it claimed to have a "unique
advantage." This opportunity was featured as one of the five
pillars of its transformation at the 2016 Investor Day and was
emphasized again when discussing the "cloud opportunity" for these
products at the 2018 Investor Day. After years of investment and
poor traction, Western Digital finally announced its exit from this
initiative in 2019 and sold its main product, ActiveScale, to
Quantum Corporation in 2020 for only $2
million.
Execution & Financial Results
In 2020, CEO David Goeckeler
announced that Western Digital would form separate business units
for HDD and Flash. This was the right decision and underscored the
challenge of managing this diverse portfolio of assets. HDD and
Flash are entirely different technologies: spinning mechanical
disks versus leading-edge semiconductor devices. The manufacturing
processes are separate and conducted in dedicated facilities. While
the businesses share common customers, the products can be in
competition in certain use-cases. It is unfortunate that this
decision occurred only after years of execution issues as an
integrated business. Goeckeler explained this reality when he
stated, "There are technical dynamics between flash and HDD that
are very different" and that an operational separation would "lead
to better execution." However, even the operational separation has
not yielded tangible improvement. As Stifel noted in a report
published just last week, "[W]e believe WD has to improve its
execution in both businesses in order to capitalize on market
opportunities. Some are within its control, some are not, but over
the past year, execution has been shaky at best."
The operational missteps over the last six years have
consistently led to unfulfilled financial targets. An important
rationale of the SanDisk acquisition was that a larger enterprise
with greater scale, vertical integration, G&A consolidation,
go-to-market overlap and R&D efficiency would generate
significant financial synergies. These benefits were laid out in an
attractive array of long-term financial targets—a profile that
Western Digital claimed would not be possible as a standalone HDD
business. At the 2016 Investor Day and again at the Investor Day in
2018, Western Digital outlined these long-term targets to the
investment community. As Western Digital's shareholders know well,
none of these targets were achieved.
See "Western Digital Performance Against Investor Day
Targets" image.
These missed targets are especially disappointing because
Western Digital has claimed that ownership of both HDD and Flash
provides greater "understanding" and "predictability." At the same
investor event titled, "Benefits of Developing Flash and Hard Drive
Technology," a long-time executive claimed, "We can see storm
clouds gathering or winds gathering behind our back well ahead of
anyone else." Regrettably, the Company's track record would suggest
otherwise.
Enterprise Value & Valuation Multiples
Today, Western Digital has an enterprise value of $21 billion with revenue of $19 billion—a 1.1x multiple. This valuation
compares to the combined $34 billion
pro forma enterprise value of Western Digital and SanDisk when they
announced the acquisition six years ago, representing $13 billion of value loss. By contrast, in the
same period, Seagate grew its enterprise value from
$17 billion to $22 billion, with revenue of $12 billion—a 1.8x multiple. Despite having 60%
more revenue than Seagate, including $10
billion of Flash revenue, Western Digital's enterprise value
is now well below Seagate's.
See "Western Digital EV Evolution, $bn and Seagate EV
Evolution, $bn" image.
Given that Western Digital and Seagate operate highly comparable
HDD businesses with similar financial profiles (discussed more
fully in the following section), comparing valuation multiples over
time between these companies is instructive. In the chart below, we
illustrate their respective P/E multiples over the last decade,
highlighting the stark change in the relationship in 2015. The
takeaway is unambiguous: Western Digital traded at a premium P/E
multiple prior to the SanDisk deal and has since traded at a
substantial discount. Interestingly, the discount has not narrowed
despite Western Digital having had many years to improve its
operational performance and to demonstrate the merit of its
strategy. Hiring a new leadership team has also failed to tighten
the discount.
See "Forward P/E Over Time and Western Digital vs. Seagate
P/E Multiple Premium/Discount" image.
Stock-Price Performance
When Western Digital announced its acquisition of SanDisk, its
stock was trading at $75 per share.
Six years later, the stock has declined by nearly 30% to
$53 per share. In the same time
period, the S&P 500 and NASDAQ increased by 103% and 190%,
respectively. More importantly, we can look to Western Digital's
direct peers in Seagate for HDD and Micron in NAND/DRAM for
relative performance. As noted above, Seagate has remained a
pure-play HDD player and has outperformed Western Digital by a
spectacular magnitude: 229% since the SanDisk acquisition
announcement and 278% over the last decade. Micron, led by the
former CEO of SanDisk, has also outperformed Western Digital
substantially.
See "Relative Shareholder Returns (USD)" image.
In addition, it is important to highlight that Western Digital's
stock-price performance has not improved with a new leadership
team. CEO David Goeckeler and his
team have performed well despite the challenges of COVID, and we
commend the long-overdue decision to separate the HDD and Flash
business units operationally and to hire new general managers of
each. The fact that the Company's stock-price performance has not
improved despite this operational change reflects, in our view,
continued skepticism regarding the Company's ability to execute on
its strategy with this combined portfolio.
Strategic Scorecard Summary
In our diligence process on Western Digital, we evaluated
whether its SanDisk acquisition succeeded and whether HDD and Flash
should remain together. The evidence overwhelmingly suggests
that the combination has not succeeded and that the business should
separate. Western Digital did not realize the touted benefits of
acquiring SanDisk, and its valuation and shareholder returns have
suffered as a result. Indeed, Western Digital's valuation today
reflects the market's view that owning HDD and Flash together
yields a dis-synergy in terms of operational and financial
performance.
When a strategy has so clearly failed to meet its objectives, we
believe it is time to consider other alternatives. In the following
section, we outline our perspectives on a better path forward that
we believe Western Digital's Board should pursue.
Path to $100+ per Share
Today, we are recommending a strategic review at Western
Digital. We believe that the Board should immediately commence an
evaluation of the benefits of separating the Flash business, which
may include a wide range of potential transactions.
Western Digital is in the enviable position of owning two
industry-leading businesses in attractive markets with significant
scale and profitability. Both the HDD and Flash businesses can
stand alone as successful industry leaders, and both demonstrated
superior performance prior to Western Digital and SanDisk
coming together in 2016. We have high conviction that this is the
best path forward for each business' long-term success and position
in the industry. For shareholders, we believe this course of action
can deliver exceptional results, with the potential for value of
$100+ per share by the end of 2023.
Of course, what we are suggesting is not novel. We are confident
that many shareholders agree with our view and have likely
communicated the same proposal directly to management and the
Board. The equity research community also frequently highlights the
value upside from a separation, and many analysts use a
sum-of-the-parts analysis to value Western Digital. The excerpted
quotes below are a sampling of this commentary:
- "The board of directors, senior management and shareholders
should be aware of the potential value unlocking via the sum of the
parts, splitting up the company, and perhaps the most likely course
of action of simply getting its internal operations to post
consistent solid results." – Citi, March
2022
- "[W]e would also highlight continued SOTP valuation support
from a Kioxia IPO later this year…as well as a potential bidding
war for Toshiba (suggesting PE buyers see value in NAND/HDD). With
all of these factors in mind, we continue to see WDC as a TOP PICK
with fair value of at least $100" –
Evercore, May 2021
Valuation of HDD
Over the last two decades, the HDD industry has consolidated to
three companies: Seagate, Western Digital and Toshiba. Today,
Seagate and Western Digital dominate the industry, with a combined
market share of more than 80%. While each company has its strengths
and weaknesses, Seagate and Western Digital HDD are highly
comparable companies with significant scale, vertical integration
and industry-leading technology. With the benefit of a pure-play,
publicly traded HDD business in Seagate, we have a strong benchmark
for the potential valuation of Western Digital's HDD business (in
addition to the valuation history of Western Digital prior to the
SanDisk acquisition).
See "Western Digital Vs. Seagate HDD Positioning"
image.
Western Digital is currently valued at an enterprise value of
$21 billion, representing a multiple
of 1.1x LTM revenue and 3.4x LTM gross profit. This valuation
compares to Seagate's $22 billion
valuation and multiples of 1.8x LTM revenue and 6.1x LTM gross
profit. Given the comparability of these businesses, Western
Digital's HDD business can be valued at an enterprise value of
approximately $17 billion, largely
based on Seagate's revenue and gross profit multiples and using
March 2022 LTM metrics. The
implications are extraordinary for investors: Western Digital's HDD
business would be worth more than 80% of the Company's entire
current enterprise value, implying approximately $4 billion in value for Flash (or 0.4x Flash
revenue). Even if we apply punitive discounts to the HDD business,
we believe the market-implied valuation for Flash is highly
compelling.
See "Current Multiples and Western Digital Current EV &
Implied NAND EV" image.
Valuation of Flash
The Flash industry has grown tremendously over the last decade
and is expected to continue growing at a 12% annual rate over the
next several years. Interestingly, long-rumored consolidation has
been slow to develop, as numerous scale players remain. These
include Samsung, Kioxia (formerly Toshiba Memory), Western Digital,
SK Hynix (including its ownership of Intel NAND), Micron and YMTC.
None of the publicly traded companies are pure-play NAND
businesses, which makes valuation comparisons between these
companies difficult.
Instead, we can review the history of NAND M&A transaction
multiples for valuation guidance. We can begin with Western
Digital's own acquisition of SanDisk in 2016 for $17 billion in enterprise value, representing a
multiple of 3.0x LTM revenue. In 2017, an investor group led by
Bain Capital paid $18 billion for
Toshiba Memory (now called Kioxia) at a valuation of 1.9x LTM
revenue. In 2020, SK Hynix bought Intel's NAND business for
$9 billion, representing 1.8x LTM
revenue in total cash consideration.
We believe the valuation for Kioxia is most informative given
its special relationship as the JV partner to Western Digital's
Flash business. Together, Kioxia and Western Digital share
extensive R&D development and manufacturing facilities in
Japan and enjoy differentiated
technology and scale advantages. Western Digital's interest in
acquiring Kioxia is well documented over the years, including the
$14 billion bid proposal in 2017
(1.8x LTM revenue) and the rumored $20
billion transaction value last year (1.7x LTM revenue). In
the last five years, Kioxia has been publicly rumored to receive
interest from a long list of other strategic and financial parties,
including Micron, Broadcom, SK Hynix, Foxconn, Kingston, Softbank, KKR and Silver
Lake.
See "NAND M&A Precedents, EV/LTM Revenue" image.
We also have the benefit of SanDisk's trading history as an
independent public company prior to Western Digital's acquisition.
Before the transaction announcement, SanDisk generated $1.2 billion of operating profit on $6 billion of revenue and was valued at an
enterprise value of $12 billion.
Since then, the NAND flash industry has continued to grow, and
Western Digital's Flash business now generates $10 billion of revenue with strong gross margins.
This scale, in conjunction with the differentiation of its
two-decade partnership with Kioxia, would position the Flash
business for success as a standalone company once again.
Based on our review of precedent transactions, the trading
history and our perspectives on the NAND industry over the next
several years, we believe Western Digital's Flash business can be
worth $17 to $20 billion, or 1.5x to 1.75x 2023 revenue. We
believe there could be meaningful upside to this valuation based on
the long track record of synergy realization in analogous
consolidation transactions within the HDD and DRAM industries.
Proposed Direct Investment in Flash
To demonstrate our own conviction in the value of a standalone
and focused Flash business ("FlashCo"), Elliott is proposing to
invest $1+ billion of equity capital into FlashCo at the same
valuation range of $17 to
$20 billion with proceeds to be used
for continued growth and the next generation of manufacturing
facilities. This capital could be utilized either in a spin-off
transaction or as equity financing in a sale or merger with a
strategic partner. We would welcome the opportunity to make this
direct investment, as we believe the need for future NAND capacity
is attractive and can generate strong returns. In addition, we
believe there are likely other strategic and financial parties who
would have an interest in participating in a transaction as
well.
With Western Digital's decision to withdraw its dividend, the
Company has de-levered to less than 1.4x credit-agreement EBITDA
(and 0.9x on a net debt basis). This de-leveraging since the
SanDisk acquisition provides flexibility for the potential capital
structures of the HDD and Flash businesses. In conjunction with our
proposed $1+ billion equity investment, we strongly believe that
both businesses would have conservative capital structures to fund
organic investment and the ability to initiate a new capital-return
program for shareholders.
Unique Value Opportunity
We believe the value opportunity at Western Digital is uniquely
compelling. While both business units experience cyclicality in
demand and pricing, we believe they both can continue to grow with
their markets and generate solid profitability and free cash flow
over the next several years. In the analysis below, we illustrate
the path to $100+ per share by the end of 2023, representing a
total return of approximately 100% during the period. Our 2023
valuation assumes that HDD is worth $17.8
billion (1.9x CY23E revenue), that Flash is worth
$18.1 billion (1.6x CY23E revenue)
and that Western Digital generates more than $2 billion of free cash flow through the end of
2023 (after separation costs and the IRS settlement).
See "Western Digital CY23 EV Bridge, $bn and Western Digital
CY23 Target Price Bridge, $ per share" image.
We rarely identify opportunities with such an attractive
risk-return profile, especially in situations where a Board can
take clear, value-maximizing action. This level of upside would far
outweigh any potential costs incurred to facilitate the separation.
In addition, any collaboration that occurs today between HDD and
Flash can be maintained through a thoughtfully constructed
commercial agreement to ensure both businesses can succeed
independently without sacrificing initiatives that would benefit
from ongoing partnership. These agreements are common in numerous
examples of spin-offs and sale transactions involving a business
unit.
Finally, Western Digital reminds us of similar companies where
we have seen substantial strategic, financial and operational
benefits from a separation. A highly relevant and recent example is
the spin-off of Dell Technologies' interest in VMware. Elliott had
a long-term investment in this situation dating back to EMC in
2014, when we advocated the separation of EMC's interest in VMware.
After Dell acquired EMC in 2016, Dell integrated EMC into its core
business and began a multi-year effort to leverage the scale and
capabilities of Dell, EMC and VMware. Eventually, Dell determined
the best path for both companies was a spin-off of its interest in
VMware in 2021. Of particular relevance to Western Digital,
Dell and VMware also entered into a commercial agreement to
maintain their strategic relationship, co-engineer solutions and
align on sales and marketing activities. The results were
exceptional: Dell's stock has earned a 78% total return since the
announcement of a spin-off exploration.
Working Together
In closing, we have great respect for Western Digital's history
and the critical role it plays in the computing and storage
industry. Few companies can claim five decades of success through
tidal waves of technological change. This achievement was made
possible through the effort and ingenuity of Western Digital's
leadership and employees over multiple generations. Western
Digital's people and products are industry leading; with the right
strategic course correction, the Company will be well positioned
for its next decade of success.
As a next step, we look forward to discussing our
recommendations with you over the next several weeks. Our goal is
to align with the Board on this path forward, and Elliott would
welcome the opportunity to engage closely with the Company
throughout this process. We appreciate your consideration and will
make ourselves available at your convenience for further
discussions.
Best regards,
Jesse Cohn
Managing Partner
Jason Genrich
Senior Portfolio Manager
About Elliott
Elliott Investment Management L.P. manages approximately
$51.5 billion of assets. Its flagship
fund, Elliott Associates, L.P., was founded in 1977, making it one
of the oldest funds under continuous management. The Elliott funds'
investors include pension plans, sovereign wealth funds,
endowments, foundations, funds-of-funds, high net worth individuals
and families, and employees of the firm.
1 Elliott's involvement in this market dates to
our 2006 investment in Flash provider, Lexar, which was acquired by
Micron. Over the course of our investment, we engaged with numerous
industry players, including the leadership team of SanDisk at the
time.
Media Contact:
Stephen
Spruiell
Elliott Investment Management L.P.
(212) 478-2017
sspruiell@elliottmgmt.com
View original content to download
multimedia:https://www.prnewswire.com/news-releases/elliott-investment-management-sends-letter-to-the-board-of-western-digital-corporation-301538357.html
SOURCE Elliott Investment Management L.P.