$30 Billion in Tech Mergers Reflect Industry Pressures

Irvine-based Western Digital has acquired SanDisk in a move toward developing flash memory and taking the focus off personal computers.

by Pete Carey, San Jose Mercury News / October 22, 2015
Silicon Valley Flickr/Nouhailler

(TNS) -- Two Silicon Valley semiconductor companies agreed to be acquired Wednesday in mergers that totaled nearly $30 billion.

SanDisk, a Milpitas flash memory maker, said it is selling itself to Irvine-based Western Digital for $19 billion.

And Milpitas-based KLA-Tencor, which makes semiconductor process equipment, said it is being acquired by Lam Research of Fremont, another semiconductor equipment maker, for $10.6 billion.

The deals reflect pressures in the industry from various trends, ranging from the demands Moore's Law is placing on chipmakers to slowing sales of personal computers and a shift away from traditional storage devices to flash memory.

Western Digital makes hard drives and is facing a shift to flash memory in smartphones and data center storage, which SanDisk makes.

"The combined company will be ideally positioned to capture the growth opportunities created by the rapidly evolving storage industry," Steve Milligan, chief executive of Western Digital, said in a prepared release.

SanDisk, which employs 8,700 people, has also been wooing large corporations -- the customers that Western Digital already sells to, said Tim Arcuri, semiconductor analyst with Cowen & Co.

Another trend was apparent in the deal for SanDisk -- China's drive to build a domestic chip industry. The deal gives Western Digital access to SanDisk's technology for making flash memory chips, something one of Western Digital's newest major shareholders could use.

Unisplendour, a subsidiary of China's Tsinghua University, which is at the forefront of China's drive to develop a domestic chip industry, in September bought 15 percent of Western Digital's shares at a 30 percent premium for $3.8 billion and took a seat on its board.

"What China desperately wants is memory technology. They can't close this massive trade imbalance they have in semiconductors without memory," Arcuri said.

Unisplendour acquired a 51 percent stake in Hewlett-Packard's Chinese server unit for $2.3 billion in May.

Wednesday, SanDisk reported financial results that topped Wall Street's expectations.

The offer from Western Digital values SanDisk at $86.50 a share. That's 15 percent higher than the Tuesday closing price for SanDisk of $75.19.

Lam Research's acquisition of KLA-Tencor is a consolidation of two companies that make equipment manufacturers use to make semiconductors.

Customers of KLA, with about 6,000 employees, and Lam, which employs 7,300, have been urging the two companies to get together, Acuri said.

"A good merger is one that solves problems for the customers, and that's what this does," he said.

Although both companies sell chipmaking equipment to the same customers in the semiconductor industry, there is not a lot over overlap in what they make, said Mahesh Sanganeria, an analyst with RBC Captial Markets.

Lam makes equipment that imprints semiconductors onto silicon, while KLA designs and sells equipment that looks for defects in finished wafers.

"It's a pretty good fit," Sanganeria said.

In a nod to the difficulties of keeping up with Moore's Law as dimensions of the elements on chips grow ever tinier, Lam Research's president and CEO, Martin Anstice, said the combined companies will be better positioned "to meet the market demands of lower power, higher performance, and smaller form factors."

Rick Wallace, president and CEO of KLA-Tencor, said the deal "represents a great outcome for all of KLA-Tencor's key stakeholders." He added that shareholders "will receive compelling upfront value, in addition to the opportunity to own a meaningful stake in an industry leader and participate in the upside potential created by the combination."

The deal is expected to produce about $250 million annual savings over the next two years, increasing to $600 million by 2020.

KLA-Tencor's shareholders will receive $5 billion in cash and $5.6 billion in shares of Lam Research, and are expected to own about 32 percent of the combined company. The deal is expected to close in 2016.

Staff writer George Avalos contributed to this report. Contact Pete Carey at 408-920-5419. Follow him at Twitter.com/petecarey.

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