Kioxia's Flash Deal to Back Merger with SK Hynix Support

On February 18th, it was reported that Kioxia, a prominent Japanese NAND Flash manufacturer, has extended a proposal to its investor, SK Hynix. The proposition involves inviting SK Hynix to engage in NAND Flash production at Kioxia's Japanese facility in exchange for a reconsideration of SK Hynix's position on the merger plans between Kioxia and Western Digital. The level of interest from SK Hynix in this proposal remains uncertain at this point.

Amidst a challenging global economic landscape, diminished demand, and sustained price declines in the NAND Flash memory market, both Western Digital and Kioxia encountered financial difficulties last year. To secure additional funds for operations and bolster competitiveness, Western Digital aims to separate its NAND Flash memory division and integrate it with Kioxia. The anticipated new entity resulting from this merger is expected to adopt a dual-board system, with executives from both flash memory chip manufacturers serving on the boards. The operational leadership of the merged company will be in the hands of Kioxia's team, with the headquarters situated in Japan, and plans for future listings on the NASDAQ and Tokyo Stock Exchange. It is important to note that Western Digital's hard drive business will remain independent and unaffected by the transaction.

According to TrendForce data, in the third quarter of 2023, the merged company of Kioxia and Western Digital is projected to command 31.4% of the global 3D NAND Flash market, surpassing SK Hynix's 20.2% and matching Samsung's 31.4%. This positions the merged entity to potentially become the world's largest NAND Flash manufacturer, influencing revenue and market pricing significantly. However, SK Hynix, as Kioxia's indirect major shareholder, perceives the transaction as a threat and opposes it.

During SK Hynix's financial conference on October 26, 2023, the company officially communicated its opposition to the merger between Kioxia and Western Digital. SK Hynix's CFO stated, "This transaction undervalues our stake in Kioxia, and considering the overall impact on the value of our investment in Kioxia, we currently disagree with this transaction."

Bain Capital currently holds approximately 56.24% of Kioxia, while Toshiba holds about 40.64%. Notably, SK Hynix indirectly owns about 34% of Kioxia through Bain Capital (valued at around 400 billion yen or approximately 2.67 billion USD). Therefore, for the smooth merger of Kioxia and Western Digital, the approval of SK Hynix, a significant shareholder, is crucial.

Due to SK Hynix's explicit opposition, on October 26, 2023, Western Digital officially notified Kioxia that the merger negotiations were terminated as they failed to obtain the consent of SK Hynix, Kioxia's indirect shareholder.

In an effort to overcome this obstacle and gain SK Hynix's support, Kioxia proposed allowing SK Hynix to use the jointly operated 3D NAND Flash factory in Japan, which is run by Kioxia and Western Digital. This strategic offer aims to pave the way for approval of the merger between Kioxia and Western Digital.