CHIPS: Western Digital, Taiwan Threaten Tsinghua Chip Dreams

Bottom line: Chinese buyers may be forced to abandon their pursuit of chip makers in the west and Asia, following the latest collapse of a deal for a stake in Western Digital over concerns of a national security veto by Washington.

Unigroup scraps Western Digital investment

Globally acquisitive chip makers Tsinghua Unigroup and sister company Unisplendour are quickly becoming the belles at the ball who can’t find a mate despite their huge dowries. That’s the bottom line in this tale of China’s dream of building a global semiconductor chip giant, which has just received a major setback with word that Unisplendour has formally dropped its bid to buy 15 percent of US hard drive maker Western Digital (Nasdaq: WDC).

If Unisplendour and Unigroup are the wealthy belles at the ball in this story, then the character intent on spoiling any potential unions is Washington, which worries such marriages could threaten national security by giving Beijing sophisticated technology. Taipei is also looming as another potential spoiler, as other headlines say the government there will give unprecedented scrutiny to a series of similar proposed stake purchases of local chip makers by Unisplendour and Unigroup.

Yet another headline on this pair of companies owned by China’s prestigious Tsinghua University is also in the news, with word that Unigroup and privately run Chinese TV giant TCL (Shenzhen: 000100) have formed a new 10 billion yuan ($1.5 billion) fund to invest in the chip sector. (English article; Chinese article) This particular plan looks like Unigroup’s desperate attempt to show Washington, Taipei and other doubters that it’s not simply an arm of Beijing seeking to get its hands on sophisticated foreign technology, and is a real commercial entity.

We’ll return to the big picture shortly, but first let’s recap the latest headline that has seen Western Digital announce the formal termination of its planned sale of 15 percent of itself to Unispendour for $3.8 billion. (English article; Chinese article) The 2 sides announced the deal last year, and Western Digital later said it believed it structured the sale in a way that would exempt it from a national security review by Washington.

But the Committee on Foreign Investment in the United States (CFIUS) thought differently, and earlier this month Western Digital disclosed the deal might have to undergo a national security review after all. (previous post) That move clearly worried both sides over a possible veto, leading to this ultimate decision to scrap the deal.

SanDisk Deal Affected

The collapse of this deal also throws into question Western Digital’s separate plans to purchase memory chip maker SanDisk (Nasdsaq: SNDK) for $19 billion, since that deal was partly dependent on funds from the Unisplendour investment. Thus in light of the Unisplendour deal collapse, Western Digital has formally lowered its offer for SanDisk by 9 percent from an original $86.50 per share to $78.50.

If all of this looks bad for Unigroup and Unisplendour, even more bad news could soon be coming if Taipei takes similar moves to quash 3 similar pending acquisitions of local chip makers by the Chinese pair. Media are interpreting new comments from Taiwan government officials as showing the 3 announced Taiwan deals, worth a combined $2.6 billion, will get a high degree of scrutiny and that one or more may get vetoed. (English article)

The potential for this kind of development was first hinted at in December remarks from Tsai Ing-wen, the woman who would be elected Taiwan’s new president a short time later and who is far more wary of closer ties with China than her predecessor. At that time, Tsai called the series of purchases a potentially “huge threat” to both Taiwan’s national security and its important semiconductor chip industry. (previous post)

Unigroup and Unisplendour have previously disclosed that they have access to tens of billions of dollars in cash for acquisitions, but these latest developments show that simply having lots of money may not be enough to power its dreams of building a global chip maker. These latest setbacks, combined with several others I haven’t mentioned, may ultimately force Tsinghua to abandon any future pursuit of acquisitions in the west or Asia, since there is little it can do to prove that it’s a commercial venture and not a policy tool of Beijing.

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