SanDisk Corporation (NASDAQ:SNDK) announced its third quarter earnings on October 21, reporting a sustained period of weakness in product revenues. SanDisk’s net revenues through Q3 were down by 17% year-over-year to $1.45 billion.  Revenues have been low throughout the year, with combined revenues from Q1 through Q3 falling by 18% y-o-y to just over $4 billion. Over the last month or so, there was speculation about a possible acquisition by Western Digital (NASDAQ:WDC) or Micron Technology (NASDAQ:MU). Just before its scheduled earnings call, SanDisk confirmed that it had entered into a definitive agreement whereby it will be acquired by Western Digital.  The deal is valued at $86.50 per share, with Western Digital paying $85.10 in cash along with 0.0176 shares of Western Digital common stock per share of SanDisk common stock. If Western Digital’s Unisplendour transaction fails to go through, then Western Digital will pay $67.50 in cash and 0.2387 shares of Western Digital common stock per share of SanDisk common stock.
SanDisk’s stock price has risen by over 40% this month. SanDisk’s stock was trading at over $100 in early January before falling to under $50 by late August.
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Western Digital Acquires SanDisk
Micron was reported to be interested in acquiring SanDisk over the few months. Back in July, there were reports that the Tsinghua Unigroup was preparing a $23 billion takeover of Micron. After these talks subsided, there were rumors that Micron could possibly look into acquiring SanDisk. It made sense that Micron would be interested, since the falling prices of flash storage globally have put pricing pressure on flash chipmakers including Toshiba, SanDisk and Micron. Consolidation in this market could help stabilize prices and lead to healthier margins. However, Micron would have required approval from SanDisk’s business partner Toshiba for any acquisition bid since SanDisk uses Toshiba’s fab facilities to manufacture chips. Moreover, both companies announced a joint decision to co-produce 3D chips last year. It was unlikely for Toshiba to approve Micron’s bid given that it directly competes with Micron in the memory chip market.  Moreover, things could get complicated with Micron’s existing deal with Intel (NASDAQ:INTC) to produce 3-D NAND chips.
The other interested party was Western Digital. At the end of last month, Western Digital announced that Chinese state-backed Unisplendour Corporation – a subsidiary of Tsinghua Holdings – would be investing $3.8 billion in Western Digital for a 15% equity stake. Western Digital’s management indicated that the equity investment by Unisplendour would help facilitate growth and future strategic initiatives. The “future strategic initiative” turned out to be SanDisk, with both parties announcing the $19 billion acquisition. Western Digital has been betting on hard drives for a long time, and was reluctant to completely switch over to flash-based storage solutions. SanDisk fills that void perfectly, and the resulting combined entity could have a formidable presence in the storage market with both the hard drive business and flash-based storage under its belt.
Q3 Results By Division
SanDisk’s solid state drive (SSD) division has witnessed explosive growth over the past few years, with revenues growing from around $150 million in 2011 to $1.9 billion in 2014. The company had a solid 2014 for SSD sales, with 60% annual growth in SSD segment revenues to $1.9 billion. However, SanDisk’s client SSD sales through the first half of the year were down by almost 56% y-o-y to $300 million. The trend continued in Q3, with client SSD product sales falling by over 51% on a y-o-y basis to $145 million. Similarly, removable storage revenues were down by over 17% y-o-y to just over $1 billion through the first half of the year and fell by 19% y-o-y to $537 million in Q3. Falling average prices per GB of removable flash storage was largely responsible for the decline in revenue. Moreover, embedded storage revenues were down by about 6% annually to $583 million for the first half of the year, with Q3 reflecting a similar trend. Embedded storage revenues through the September quarter were down by about 7% over the prior year quarter to $392 million.
On the other hand, enterprise SSD sales were up by 64% y-o-y to $362 million through the first half of the year. This was the only division within SanDisk that reported year-over-year growth in revenues for both Q1 and Q2. However, revenue fell by about 9% annually to $160 million during the September quarter, primarily due to a tougher year-over-year comparison.Notes: