Shares of Western Digital (WDC 0.52%) jumped 14.5% on Tuesday after Elliott Investment Management sent a letter to the tech giant's board of directors urging it to conduct a strategic review of its operations.
Western Digital operates two largely distinct businesses. One is focused on hard disk drives that are often found in desktop computers and data centers, while the other makes NAND flash memory that's increasingly used in mobile devices.
Elliott believes that Western Digital would be better served by spinning off its flash business into a separate enterprise. The investment firm argued that Western Digital's operational and financial underperformance relative to its competitors has largely been due to its futile attempt to operate these two disparate businesses within a single corporation.
In contrast, a divestiture could allow Western Digital to split into two streamlined companies that can better focus on strengthening their competitive advantages in their respective markets. In turn, Elliott says investors would likely assign significantly higher values to the two companies post-spin-off, as they begin to trade more akin to their pure-play rivals.
All told, Elliott thinks investors could enjoy gains of over 60% as Western Digital's stock price rises to $100 per share or more by the end of 2023 -- should such a deal be completed.
Elliott has invested roughly $1 billion to acquire a 6% stake in Western Digital. Additionally, the firm has offered to invest another $1 billion into the proposed flash business. As one of Western Digital's largest investors and a potential source of valuable expansion capital, Elliott will no doubt have the attention of its board and management team.
In a response to Elliott's letter, Western Digital said it "values constructive input" from its shareholders and would review the firm's proposal:
We agree that Western Digital is an excellent, yet undervalued, company with strong positions in our flash and HDD businesses and look forward to engaging with Elliott to discuss their views.
Additionally, the company said: "Our board of directors is committed to acting in the best interests of all our shareholders and will carefully consider Elliott's ideas."