MULTINATIONALS: Unigroup Role in Western Digital, SanDisk Deal?

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Bottom line: Tsinghua Unigroup could be quietly helping to bankroll Western Digital’s bid for SanDisk, as part of its vision of building a Chinese NAND memory powerhouse that could challenge Samsung.

Unigroup bankrolling Western Digital’s SanDisk bid?

I don’t consider myself a conspiracy theorist, but a sudden flurry of multibillion-dollar memory chip deals all involving Tsinghua Unigroup is certainly catching my attention. Just a day after global chip giant Intel (Nasdaq: INTC) announced a $5.5 billion investment that looked related to Unigroup, we’re seeing yet another similarly large deal that has some indirect ties to this Chinese company linked to the nation’s top science institution, Tsinghua University.

This latest new deal will see hard disk maker Western Digital (Nasdaq: WDC) buy flash memory maker SanDisk (Nasdaq: SNDK) in a cash and stock deal worth $19 billion. (English article; Chinese article) China watchers will recall that announcement of this deal comes just 2 weeks after a Unigroup affiliate paid $3.8 billion for 15 percent of Western Digital. (previous post) I theorized a short time later that Unigroup’s sudden thirst for memory could even prompt it to make a play for storage device giant EMC (NYSE: EMC), which is in the process of being acquired by Dell in a blockbuster deal worth $67 billion. (previous post)

I’ll summarize all the various recent Unigroup deals shortly and try to figure out how they fit together, but first let’s review the latest blockbuster semiconductor merger that will bring together Western Digital and SanDisk. The deal values SanDisk stock at $86.50 per share, a 15 percent premium over its last close before the announcement. It would bring together Western Digital, which traditionally specialized in hard drives, with the world’s fourth largest maker of flash memory drives that power most mobile devices.

Now that we’ve gotten the basic details out of the way, let’s step back and review some of Unigroup’s involvement in many of the sector’s latest mega deals in the memory chip space. The Chinese company first burst into global headlines last year when Intel paid $1.5 billion for 20 percent of Unigroup’s telecoms chip design company, which was formed through the combination of 2 China-based firms that were formerly listed in New York.

Intel’s $7 Bln China Upgrade

Since that announcement, Intel has announced major upgrades for its 2 China chip plants, starting with a $1.6 billion overhaul announced late last year for its older fab in the interior city of Chengdu. (previous post) Earlier this week it announced an even bigger upgrade worth up to $5.5 billion for its newer plant in the northeast city of Dalian. (previous post)

In the Dalian announcement Intel said it would convert the plant to make NAND memory chips, from its original design to make core processing units (CPUs) for PCs. Reports at the time of the Chengdu announcement didn’t specify on the nature of that upgrade, but in retrospect it appears that plant could also be getting a similar makeover for memory chip production. Intel certainly isn’t a cash-poor company, so it could be financing the upgrades by itself. But the timing these 2 major China-based upgrades shortly after formation of its Unigroup joint venture certainly hint that its Chinese partner is helping to pay for the projects.

Similarly, the fact that Unigroup became a major shareholder in Western Digital just 2 weeks ago implies the former may now be helping the latter to finance its new bid for SanDisk. One final piece of this puzzle is Unigroup’s bid earlier this year for leading US memory chip maker Micron (Nasdaq: MU), which Unigroup abandoned due to political sensitivities.

What seems to be emerging in all this is that Unigroup may be quietly trying to build up a NAND memory producer to rival global powerhouse Samsung (Seoul: 005930), which controls about half of the market. That wouldn’t be too surprising, since China is the world’s largest manufacturer of many of the gadgets that use NAND memory chips, and the technology itself is relatively mature and thus something China could excel in.

The biggest potential obstacle for Unigroup could be integrating so many diverse pieces to its emerging NAND machine, which would span several continents and many companies. But clearly the well-connected Unigroup is trying to execute Beijing’s vision of moving up the high-tech value chain, meaning other NAND makers like Samsung could soon have a major new rival.

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