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Why Western Digital, Micron Technology, and Seagate Technology Rose Today

By James Brumley – Aug 25, 2021 at 5:17PM

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Rumors of a merger inspired investors who didn't want to ruin the rally by asking too many questions.

What happened

Shares of technology outfit Western Digital (WDC -0.22%) ended Wednesday's trading action higher to the tune of 7.8%, distantly followed by rival computer memory makers Micron Technology (MU -1.13%) (up nearly 3%) and Seagate Technology Holdings (STX -1.64%) (up less than 1%). The biggest of these three jumps was sparked by rumors that Japan's Kioxia is mulling a merger with Western Digital.

So what

The big move materialized late in an otherwise sleepy trading session, when The Wall Street Journal reported that privately held Kioxia had been in talks with Western Digital for months to strike an all-stock, $20 billion-plus deal to create an even more potent data storage competitor.

Be careful not to draw firm conclusions from the reporting, however. The financial newspaper's website only cited "people familiar with the matter" without naming names. And, neither Kioxia nor Western Digital had made an official statement on the matter as of late Wednesday. Such a pairing would also require the consent of Japan's regulators, if the whispers are indeed true.

Businessperson plotting a rising stock chart.

Image source: Getty Images.

Still, the premise itself holds some water. Kioxia -- formerly Toshiba Memory, and owned by Bain Capital -- was considering going public as of the middle of this year, reportedly aiming to complete its intended initial public offering by September. A deal with Western Digital would likely be consummated around that same time, and with less red tape as well as the avoidance of the usual post-IPO volatility.

The rumor is also credible in that Micron Technology was also at one point considering pairing up with Kioxia.

Such partnerships among technology corporations can reduce relative costs by adding scale and reach, which is a particular priority now for the memory manufacturing industry. Prices for solid state drives and more traditional hard disk drives have swung wildly in recent years. Data from hardware pricing website PC Part Picker, however, indicates hard drive prices have remained surprisingly stable since early last year, when the COVID-19 pandemic disrupted supply chains at the same time spurring a surge in demand linked to more employees suddenly working from home.

But those prices are stabilizing at relatively low levels on a per-gigabyte basis. Technology market research company IDC forecasts that worldwide solid state drive revenue will grow at an annualized pace of 9.2% through 2025, though the total amount of shipped storage capacity will expand at a yearly clip of 33%. The growth disparity reflects what IDC describes as "ongoing price erosion in the long-term SSD pricing outlook."

Now what

Investors celebrated the prospect of the rumored pairing by snatching up Western Digital en masse. And, from a certain perspective, the buying is understandable. This is a business that needs scale to grow or even merely maintain its profit margin, and the combination with Kioxia would allow that achievement. In that the privately held company's revenue and profitability isn't known, though, there's no way of knowing if the suggested value of $20 billion (or more) is a reasonable price tag -- if an offer is on the table at all.

As for Seagate Technology and Micron Technology, their more modest jumps on Wednesday make even less sense. While the suggested merger puts other potential dealmaking in play, the most plausible deal Micron was seemingly interested in making is even less likely now than it was just a few months ago. Seagate wasn't much of a merger and acquisition contender to begin with, either, and it's even less of one now as there aren't any other prospective pairings to make within the industry that would be meaningful enough to matter.

The bottom line for investors is there's nothing about Wednesday's rumors that should prompt the purchase of any of these stocks following their gains. That even includes Western Digital, which arguably has the most to gain if The Wall Street Journal's suggestion ends up being validated. Far more fiscal clarity regarding the rumored deal is needed to justify bidding up already expensive shares, especially given the competitive computer storage environment that's highly subject to price wars due to the commodity-like nature of the business.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Western Digital Stock Quote
Western Digital
WDC
$36.03 (-0.22%) $0.08
Micron Technology Stock Quote
Micron Technology
MU
$55.12 (-1.13%) $0.63
Seagate Technology Holdings plc Stock Quote
Seagate Technology Holdings plc
STX
$51.45 (-1.64%) $0.86

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