What: Storage memory specialist Western Digital (NASDAQ:WDC) had a bad month in October, with shares falling nearly 16%, according to S&P Capital IQ data. The big news of the month was that Western Digital would acquire peer SanDisk (NASDAQ:SNDK) in a $19 billion deal.
So what: Western Digital saw some early weakness when its closest peer Seagate Technology (NASDAQ:STX) lowered fiscal first-quarter guidance. This was just about the same time that Bloomberg initially reported that SanDisk was trying to sell itself, naming Western Digital as one of the front-runners. That news was enough to send shares lower to the tune of 7%, suggesting that investors really didn't want Western Digital to purchase SanDisk.
Now what: Indeed, shares feel even further when the deal was officially announced shortly thereafter. The final price was $86.50 per share, but how Western Digital pays will depend on a variety of factors.
Western Digital had previously announced an investment by Unisplendour Corporation. If this investment closes prior to the SanDisk deal, Western Digital will pay $85.10 in cash and 0.0176 Western Digital share. If the Unisplendour investment is terminated or the SanDisk deal closes first, Western Digital will pay $67.50 in cash and 0.2387 Western Digital shares. This would reduce the cash outlay required by quite a bit. Western Digital said it would also use new debt to finance the deal.
But the very fact that the SanDisk deal is putting the Unisplendour investment at risk is likely worrying shareholders, since they cheered when the investment was first announced in September. Shares jumped 15% when the investment was announced, where Unisplendour would buy a 15% stake in Western Digital, while the $3.8 billion in cash would bolster the balance sheet.
This deal is fraught with risks, and even if everything goes through, Western Digital and SanDisk are both slowing businesses.
Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.