Toshiba tears WDC a new one for meddling in memory business sale

You threaten us with contract lawyers? We'll give you lawyers

Toshiba, threatened wth financial calamity, has told WDC to butt out and stop interfering in its bid to sell its memory business.

This memory business forms Toshiba's share of the flash foundry jointly owned with WDC CEO Steve Milligan's firm.

The Japanese conglomerate has been financially devastated by overruns and losses from Westinghouse Electric, its US-based nuclear power station-building subsidiary, which is in financial meltdown and has filed for Chapter 11 bankruptcy.

The losses here are thought to be around $9bn (¥1 trillion), and Toshiba's auditors have been unable to put a final figure on them. The company filed unaudited results and risks a negative net worth as well as delisting from the Tokyo Stock Exchange.

To raise much-needed cash, it is trying to sell its NAND chips and SSD-making memory division, which is a perfectly viable and worthwhile business with good products (Dell servers use them, also NetApp arrays).

There have been four bids for the business, according to many reports:

  • WDC with a ¥1tn ($9bn) bid
  • Taiwanese Hon Hai Precision Industries (Foxconn) – ¥3tn ($27bn)
  • Broadcom – ¥2.5tn ($23bn)
  • Korea's SK Hynix – about ¥1tn ($9bn)

Once WDC – encumbered with debt from buying SanDisk, which owned half the NAND foundry venture with Toshiba – saw it was not a leading bidder, it tried to tell Toshiba it had veto rights in any sale because of the JV contract Ts&Cs.

It also reportedly started talking to US venture funds and Japanese state-run funds about partnering to bulk up its bid.

Simultaneously its CFO, Mark Long, went public with this amazing statement: "We are deeply troubled by the tension between the depth of Toshiba's desperation and their willingness to do things that we didn't think they would do in other situations. A lot of this, in the initial phases, is going to be overshadowed by the desperation of Toshiba to deal with their crisis as it has grown from a problem to an all-consuming disaster."

Toshiba has had enough of what it sees as WDC meddling in its affairs. According to reports in Bloomberg, Reuters and other media outlets, Toshiba wrote two letters to WDC on 3 May.

One, from its lawyers, asserted that WDC had no veto rights concerning ownership of Toshiba's stake in the joint venture. Just as SanDisk had freely sold its stake in the venture to WDC so too could Toshiba sell its stake to whomsoever it pleased. If WDC disagreed then Toshiba would see it in a Japanese court.

The second letter was a public slap to WDC's face. If WDC hasn't ratified a proposal "to formalize their relationship after a merger" by 15 May then Toshiba will prevent WDC employees from accessing its plants and networks. The letter read: “If Western Digital refuses, Toshiba Memory Company will have no choice but to protect its intellectual property rights by suspending Western Digital employees’ access to all TMC facilities, networks and databases."

+Comment

This is bizarre and indicative of a near total breakdown in Toshiba-WDC relations. Toshiba needs more cash than WDC is offering. WDC wants to buy the memory business for less than Toshiba could get elsewhere. It tried to play the contract law card in this extraordinarily high-stakes game and so force Toshiba's hand.

Toshiba isn't having any, and has just said: "OK, I'll accept that and raise the stakes. What you got?"

This must surely be a CEO-to-CEO negotiation now to patch up the relationship and move on.

WDC has just learnt that telling a drowning person he has to use their crummy life jacket over a better one does not go down well. It is indicative of WDC's desperation that it tried to force Toshiba's hand with a legal gambit. What also indicates a failure to understand Toshiba's situation and culture is the sending of the two letters by Toshiba to WDC.

That looks like a dreadful misjudgment. Will WDC fold and play nice, or, as it were, note Toshiba's bet, think it's still holding aces, and raise the stakes again? ®

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