Elliott Management to WDC board: Spin out or sell flash biz

HDD and NAND memory maker has 'underperformed by any objective measure'


Updated Activist investor Elliott Management is pushing for Western Digital Corporation's board to break the business in two by splitting the hard disk drive and NAND flash divisions into separately traded entities.

In an open letter to the board [PDF], Elliott – which has over time invested roughly $1 billion in WDC, representing about a 6 percent stake – says it is almost six years since WD bought SanDisk for $19 billion, scooping up its NAND memory biz.

At the time, this purchase was "nothing less than transformative", the letter adds, propelling five-decade-old WDC beyond HDDs into one of the biggest players in flash. Synergies, a better strategic position, and enhanced financial profile were among the rationale for the deal, says Elliott.

"Unfortunately for the company and its shareholders, none of these benefits have been realized," the letter states. "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" under one roof.

Underperformance "long predates" the current CEO David Goeckler and his leadership panel, who were almost all hired in 2020 or later, Elliott Management says in its missive, adding that top brass actually steered WDC through a "challenging operating environment" and "to their credit" had created distinct HDD and flash operating divisions in September 2020.

"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," the letter continues.

"We believe in a full separation of the flash business can allow both HDD and flash to be 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 a uniquely attractive upside of approximately 100 percent."

In addition to urging the bifurcation of WDC, Elliott is offering to inject $1 billion plus of "incremental equity capital" in the breakaway flash business at an "enterprise value of $17 to $20 billion", which the letter points out is close to WDC's total valuation now.

This money could be used in either a "spin-off transaction or as equity financing in a sale or merger with a strategic partner." This "underscores" Elliott's belief in the long-term value of the flash business, the letter says.

"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."

WDC is the number two player in HDDs as near-line models offset falling demand for PC HDDs. In flash, WDC's partnership with Kioxia is supposed to provide tech manufacturing leadership and economies of scale. In 2021, the business generated $821 million in net profit on the back of $16.92 billion of revenue, up 1 and 54 percent respectively.

The share price went up more than 14 percent on today's open letter to a little over $60 – yet this is still down on the March 2018 peak of $102 per share.

The Register has asked WDC to comment.

This is not the first time Elliott Management has cast a shadow over its IT investments, previously pressing Citrix, NetApp, Commvault, Dell, and others to listen and act upon its concerns. WDC's board will lend their ears to its calls for change because as its biggest investor, Elliott is unlikely to go away quietly. ®

Updated at 10.10 UTC on May 4, 2022 to add

Following publication of this article, WD told us it will "carefully consider Elliott's ideas.

"Our end market diversity and breadth, restructured organization, broad customer base, channel reach and innovative product leadership all position the company to benefit from the multi-year growth in data creation and storage...

"Our CEO, David Goeckeler and the Board of Directors have explored a range of options to unlock and deliver long-term value and we will continue our ongoing dialogue with our shareholders."

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