Bottom line: Western Digital’s planned sale of 15 percent of itself to a Chinese buyer stands a 50-50 chance of getting vetoed by Washington on national security grounds, which could throw Western Digital’s planned purchase of SanDisk into doubt.
Many have been writing about China’s mega purchase last year of a big stake in computer hard drive giant Western Digital (Nasdaq: WDC) as if it’s a done deal, even though the $3.8 billion tie-up has yet to formally close. Even the buyer, Tsinghua Unisplendour, appeared to believe its purchase of 15 percent of Western Digital was unlikely to attract controversy, and was already using the US company as part of plans to build up China’s first global memory chip giant.
But the tie-up could fall victim to US national security concerns, following Western Digital’s new disclosure that it’s extending a timeline for the deal to close due to scrutiny from Washington. It’s probably too early to say this particular deal will collapse, even though Western Digital was apparently caught off guard by the scrutiny it’s now receiving from the Committee on Foreign Investment in the US (CFIUS), which reviews major cross-border high-tech deals for national security risks.
But the signals certainly look ominous, especially since they’re coming during an election year when Washington officials often make such nationalistic steps to boost their parties’ chances in upcoming polls. Such politics nearly killed the similar sale of a bankrupt high-tech battery maker to a Chinese buyer in the last election cycle, and killed Unigroup’s bid last year to buy leading US memory chip maker Micron (Nasdaq: MU).
According to the latest headlines, Western Digital recently refiled an outline of its deal with Tsinghua Unisplendour to CFIUS, after withdrawing its original filing of documents last November. (English article) Western Digital has previously said it believes it structured the deal, first announced last October, in a way that wouldn’t make it subject to review by Washington for national security clearance.
But the latest signals indicate that CFIUS may ultimately decide the deal should be subject to a national security review. A decision by CFIUS that it has jurisdiction to review the deal wouldn’t necessarily mean a veto of the transaction is inevitable. But it would certainly send an ominous signal, since Western Digital obviously didn’t anticipate that national security would be an issue when it announced the original sale to Unisplendour.
Unisplendour and sister company Tsinghua Unigroup are both under the umbrella of Tsinghua University, China’s leading sciences university that has strong ties to Beijing. Those ties have raised concerns in Washington and also Taiwan, where the pair of Chinese firms have also announced similar purchases of stakes in local chip makers. The Chinese companies insist their ambitious are purely commercial, even though their multibillion dollar war chests for acquisitions appear to be coming from government-backed sources.
Just weeks after Western Digital announced the original stake sale plan last October, it said it would purchase US memory chip maker SanDisk (Nasdaq: SNDK) in a cash and stock deal worth $19 billion. (previous post) Timing of the 2 deals looked too close to be coincidence, and I previously speculated that Unisplendour was helping to finance the SanDisk acquisition even before it formally consummated its own purchase of the 15 percent stake in Western Digital.
A review and potential veto of the Western Digital deal by CFIUS would come as the latest setback in Tsinghua’s bid to build a global chip giant under the Unigroup and Unisplendour names. Political opposition killed the bid by Unigroup to buy Micron last year, after 2 prominent senators voiced concerns about such a deal. (previous post) More recently, Taiwan’s China-wary president-elect Tsai Ing-wen has expressed similar concerns about Tsinghua’s plans to invest in several local chip makers.
All of this shows that politicians in Washington and Taipei are clearly unconvinced by Tsinghua’s insistence that its chip ambitions are purely commercial, and that they fear giving too much advanced technology to China. As a longtime China watcher, I would tend to agree that Tsinghua’s latest chip-building ambitions have a certain political element, since Beijing would clearly like to build up the nation’s chip-making abilities.
But that said, Beijing’s ultimate goal may be more commercial, aimed at developing high-tech industries, and thus not pose any real national security threat to either Washington or Taipei. Despite that assessment, I do think politicking will ultimately play a role in Tsinghua’s overseas buying spree. That means CFIUS may ultimately veto the Western Digital stake purchase, which in turn could cause the SanDisk deal to collapse.
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