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Toshiba Sues Western Digital, Demands 120B Yen in Damages

Relationship between Western Digital Corp WDC and Toshiba recently turned murkier, after the Japanese conglomerate filed a lawsuit at the Tokyo District Court against its joint venture (JV) partner, demanding 120 billion Yen ($1.1 billion) in damages.

Per Bloomberg, Toshiba’s claim for damages is primarily due to the loss of information, as well as Western Digital’s interference in the proposed divestiture of the flash memory chip business. Meanwhile, in order to protect its trade secrets, Toshiba has already started blocking the U.S. company’s access to information in the three NAND flash-memory JVs.

In response, Western Digital stated that the lawsuit is “frivolous and without merit”. Per Reuters, the company stated that the lawsuit and other moves taken by Toshiba are hurting the interest of stakeholders as well as customers.

Western Digital-Toshiba Feud Escalates

Based on the JV agreement, Western Digital insists that it has rights to approve or disapprove any transaction that involves the partnership. However, Toshiba counterclaimed that the JV agreement doesn’t give the right to either party to block the other from selling its share. It also pointed out that Western Digital itself bought SanDisk without seeking or receiving Toshiba’s approval.

Post Toshiba’s denial, Western Digital evoked an arbitration clause in the agreement. Moreover, to stall the proposed transaction, the company also sued the Japanese conglomerate in a California court. Per Reuters, Western Digital expects to get a ruling over its injunction appeal by mid-July.

Currently, Toshiba values the chip unit at 2 trillion yen. The company is in dire need to raise capital to remain as a listed entity, after it posted a massive loss of 950 billion yen (almost $8.6 billion) in the fiscal year ended March. Most of the loss can primarily be attributed to write-downs related to its now-bankrupt Westinghouse nuclear business.
 

Toshiba received a number of bids including Western Digital’s 1.5 trillion yen offer, which was, however, rejected. Instead, the company preferred a 2.1 trillion yen bid from a consortium led by Bain Capital and supported by the Japan Government. Reportedly, the consortium has asked Toshiba to resolve the dispute with Western Digital, before it invests in the business.

Stalled Negotiations to Hurt Toshiba

Western Digital along with private-equity firm KKR submitted a fresh bid (in line with Toshiba’s valuation), in a desperate attempt to acquire the chip unit. The last-minute effort reflected the significance of the flash memory technology, which is now, preferred over legacy hard-drive storage systems due to speed and reliability. Notably, Toshiba is the second-largest NAND flash memory maker.

We note that Western Digital’s aggressive stance is understandable as the loss of Toshiba’s technology and operations will hurt its competitive position in the rapidly growing NAND flash memory market against the likes of Seagate STX and NetApp NTAP.

However, Toshiba missed Jun 28 deadline to complete the proposed sale. The company cited differences of opinion among the consortium members behind the stalled negotiations.

According to Reuters, apparently, some of the board members have raised objections about technology leaks to South Korean chip-maker SK Hynix, which is one of the financiers of the Bain consortium. Western Digital has also opposed SK Hynix’s participation in the bidding process.

We believe that the stalled negotiation as well as the increasing legal complexities doesn’t augur well for Toshiba.

Western Digital sports a Zacks Rank #1 (Strong Buy). YYou can see the complete list of today’s Zacks #1 Rank stocks here. Broadcom AVGO with the same Zacks Rank is another stock worth watching in the broader sector. Long-term earnings growth is currently pegged at 13.57%.

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