Shares of Western Digital Corp. jumped more than 6% today after it announced plans to break up into two companies that will separately make hard drives and flash storage.

The development comes about 18 months after activist investor Elliott Investment Management called on the storage maker to explore a corporate split. The news also follows the reported collapse of merger negotiations between Western Digital and Kioxia Holdings Corp., one of its most important suppliers. The ongoing slowdown in flash demand may have been yet another factor that influenced the company’s decision to separate its two core businesses.

Western Digital started out in 1970 as a manufacturer of semiconductor testing equipment. It went on to become a major producer of calculator chips and, later, hard disk drive controllers, tiny processors that are embedded into hard drives to manage the flow of data to and from the host computer. In the 1980s, the company shifted from making HDD controllers to making entire HDDs, which is what laid the foundation of its current business.

Western Digital supplies hard drives for a range of systems ranging from personal computers to data center storage arrays. It’s also a major maker of flash chips. Additionally, the company offers various related products including edge servers designed to run outside a traditional data center.

Last May, Elliott Management disclosed that it has amassed a more than $1 billion stake in Western Digital. It paired the disclosure with a public letter that called on Western Digital to explore the possibility of a corporate split. A few months later, the storage maker accepted Elliott’s proposal as part of an agreement that saw it raise $900 million in funding from the investment firm and Apollo Global Management.

Western Digital makes many of its flash chips at fabs it jointly owns with Tokyo-based Kioxia, a former Toshiba Corp. unit that spun off in 2017. In 2021, rumors emerged that the two companies had launched discussions about a potential merger. Last week, however, sources told the Financial Times that Western Digital has decided to scrap the deal.

The development reportedly came after SK hynix Inc., one of the world’s top flash makers, announced it wouldn’t support a merger. SK hynix is an investor in both Western Digital and Kioxia, as well as a competitor. It acquired a $3.5 billion stake in Kioxia when the latter company spun out of Toshia six years ago. 

The collapse of the merger talks may have been a factor in Western Digital’s decision to separate its flash and HDD businesses. “During our strategic review process, we thoroughly evaluated strategic transactions that could be value-accretive to Western Digital,” said Western Digital Chief Executive Officer David Goeckeler. “However, given current constraints, it has become clearer to the Board in recent weeks, that delivering a stand-alone separation is the right next step in the evolution.”

In conjunction with the announcement of the split, Western Digital today reported financial results for its fiscal first quarter. The company’s revenue dropped 26% year-over-year, to $2.75 billion, in the three months ended Sept. 30. The slump was caused mainly by its data center business, which experienced a 52% decrease in sales.

Western Digital’s revenue drop came against the backdrop of a major slowdown in flash demand that has also weighed on the earnings of its competitors. Demand for HDDs, in turn, also decreased over the past year as more PC manufacturers switched their devices to flash. Yet despite the changes in the PC market, the one major bright spot in Western Digital’s latest earnings report is its consumer business, which saw sales grow 7% year-over-year last quarter.

The company expects storage demand to start recovering in the coming months. “We are now emerging from a historic cyclical downturn in storage,” Goeckeler said. “Moving forward, as we progress through fiscal year 2024, we see an improving market environment in both businesses, and we will remain open to strategic opportunities that unlock further value in both our HDD and Flash investments and assets.”

Western Digital expects to complete the split next year. The two companies poised to emerge from the transaction will be publicly traded. 

Photo: Western Digital