Western Digital jumped over 10% in premarket trading after activist Elliott Management disclosed a $1 billion stake and called for the company to separate its hard disk drives and NAND flash memory businesses.
By separating the businesses, Elliott believes Western Digital (NASDAQ:WDC) could reach $100+ by the end of 2023, representing 100% upside, according to a statement.
The full text of the letter follows:
May 3, 2022
Western Digital Corporation5601 Great Oaks ParkwaySan Jose, CA 95119
Dear Members of the Board:
We are writing to you on behalf of Elliott Associates, L.P. and Elliott International, L.P. (together, "Elliott" or "we"), which have an investment of approximately $1 billion and representing over 6% of Western Digital Corporation (the "Company" or "Western Digital"), making us one of the Company's largest investors.
Western Digital serves a critical role in providing fundamental technology to support the ongoing growth of data in two market-leading franchises—hard disk drives ("HDD") and NAND flash memory ("Flash"). In the HDD market, Western Digital has a strong competitive position as the #2 player in an industry that today represents a compelling opportunity, as the demand for near-line HDDs has come to outweigh the steady decline in client PC HDDs. In the Flash market, Western Digital's successful partnership with Kioxia provides technology leadership and important scale benefits as Flash continues its long-term, secular growth.
It has been nearly six years since these two businesses came together through the $19 billion acquisition of SanDisk in 2016. The acquisition was nothing less than transformative. With a single transaction, Western Digital diversified its nearly five-decade business away from HDD and became one of the largest Flash players in the industry. The stated rationale for the deal was the expected synergistic effects of combining a broad portfolio of technologies, improved strategic positioning with customers and an enhanced financial profile.
Unfortunately for the Company and its shareholders, none of these benefits have been realized. By any objective measure, Western Digital has underperformed—operationally, financially and strategically—as a direct result of the challenges of operating two vastly different businesses as part of the same company. This underperformance is particularly disappointing given the Company's great potential in both businesses.
It is important to emphasize that Western Digital's underperformance long predates CEO David Goeckeler and his leadership team, nearly all of whom were hired in 2020 or later. David and his team have steered the Company through a challenging operating environment, and to their credit, they made the important decision in September 2020 to separate the operations of HDD and Flash into separate business units. While this separation was a positive step, the hope that it would lead to better execution has not materialized, and Western Digital's current valuation makes clear that the investment community has not been persuaded that this necessary-but-insufficient step has solved the problem.
We believe a full separation of the Flash business can allow both HDD and Flash to be more successful and unlock significant value. By executing on a separation, we believe Western Digital's stock price could reach $100+ per share by the end of 2023, representing uniquely attractive upside of approximately 100%.
In addition to our public investment in Western Digital, Elliott is also offering $1+ billion of incremental equity capital into the Flash business at an enterprise value of $17 to $20 billion (a valuation close to the Company's entire current enterprise value), which can be utilized either in a spin-off transaction or as equity financing in a sale or merger with a strategic partner. This investment proposal underscores our conviction on the merits of a separation as well as our belief in the long-term prospects of the Flash business.
Today, we are calling on the Board to conduct a full strategic review of these ideas, confident in our view that a comprehensive, independent exploration of the value potential will point decisively toward a separation of HDD and Flash. Though the majority of this Board and management team were not involved in the SanDisk decision, it is nevertheless this Board's responsibility to address current market realities and set the Company on the right course. We are making our perspectives on these matters public, as we want to be transparent and provide all constituents with the opportunity to weigh in for the Board's consideration. At the same time, our goal is to align with you and work closely with the Company to determine the best path forward. To that end, we would welcome a meeting at your convenience to discuss the vision outlined in this letter.