My Passport portable hard drives is one of Western Digital's most popular product families. Image source: Western Digital.

Ever since news broke last week that SanDisk (UNKNOWN:SNDK.DL) was putting itself up for sale, there's been plenty of speculation about who might be a potential suitor. Peers Micron and Western Digital (NASDAQ:WDC) have been the clear front-runners of the speculation, and Bloomberg followed up earlier this week that the latter company was already in "advanced talks" to seal the deal. Western Digital is reportedly considering a price of $80 to $90 per share and would fund the deal with all cash.

But judging by the market's reaction, with shares falling 7% yesterday, that news is decidedly not music to investors' ears.

It sounds good on paper
On the surface, it might seem that Western Digital and SanDisk would be a good fit. The product portfolios of both companies are seemingly complementary: SanDisk sells a lot of NAND into mobile devices as well as removable SD cards and USB drives, while Western Digital has long made hard drives for consumer desktops and also offers enterprise storage solutions.

But Western Digital's core business of selling storage into PCs, which accounts for over 40% of revenue, faces secular headwinds as the PC market has been stagnating for years. CEO Steve Milligan acknowledged this last quarter, saying he was "satisfied" with Western Digital's performance "in light of the weak PC market." The PC market isn't reaccelerating anytime soon either.

Sure, sometimes companies like to acquire complementary businesses in order to juice growth rates, but SanDisk is also a slowing business. SanDisk's largest segment is removable storage like SD cards and USB flash drives, accounting for a towering 44% of revenue last quarter. The next largest segment comprises just 20% of sales. This is how SanDisk's removable storage revenue has fared over the past six quarters.

Source: SEC filings.

People simply don't buy thumb drives like they used to. In other words, a slowing business buying another slowing business at a hefty price tag doesn't sound all that appealing to Western Digital shareholders. When Western Digital scored a $3.8 billion investment from China's Tsinghua University last month, the company said it might use the money to fund "long-term strategic growth initiatives," but SanDisk may not necessarily fit the bill.

It's probably a bad idea
SanDisk teamed up with Toshiba years ago to develop and manufacture 3D NAND flash, which rearranges the architecture from horizontal (planar NAND) to vertical. The industry has been transitioning to 3D NAND for a few years. SanDisk's reported move to sell itself is also causing some concern among analysts, who think perhaps the 3D NAND road map is in trouble. If so, any premium could be hard to justify.

At the same time, acquiring SanDisk would put Western Digital on the hook for continued capital expenditures related to the Toshiba joint venture, in addition to Western Digital's own planned capital expenditures. In some respects, a deal between SanDisk and Western Digital makes sense. But from most angles, it probably doesn't.