What: Shares of SanDisk (UNKNOWN:SNDK.DL) gained 41.7% in October, according to data from S&P Capital IQ. The maker of Flash memory chips and the storage devices that they enable did report third-quarter results during the month, but that was not the big value driver. Instead, investors are enjoying a rich buyout premium in a merger with hard drive veteran Western Digital (NASDAQ:WDC).
So what: It's OK if you're confused. SanDisk announced its Western Digital deal right alongside those third-quarter results, all on the same morning. By then, the buyout had already been rumored for more than a full week, pitting Western Digital against Micron Technology (NASDAQ:MU) as another potential buyer. So, when the final deal was properly announced, SanDisk shares only rose 3% on the news. A 22% buyout premium had already been baked into the shares.
Now what: In all honesty, a Micron deal would have made more sense to me. A merger like that would put two strong Flash memory brands together under one roof, strengthen Micron's budding control over memory production volumes and market prices, and boost Micron's retail presence, all in one fell swoop.
It's not that Western Digital doesn't make sense, mind you. The hard drive maker could certainly use a turnkey entry into the Flash-based solid-state storage market, and SanDisk provides exactly that. But Micron is the larger and more profitable of SanDisk's two rumored suitors. Maybe that's why Western Digital ended up paying such a high price for the Flash specialist -- desperate times call for desperate measures.
Given the near-equal market caps of buyer and target, you might expect the buyout to be structured as a stock-for-stock trade. That's not the case at all. Currently, only 1.6% of the final price tag will be covered by newly printed Western Digital shares, the rest being backed by a massive $18.4 billion of fresh debt papers. That split may change somewhat if Chinese investment firm Tsinghua Unigroup is allowed to buy 15% of Western Digital as planned, but the lion's share of this deal is still cash-backed.
That's why the two stocks haven't moved in absolute lockstep since the deal was announced, as you would expect in a share-based merger. Instead, Western Digital's shares have fallen more than 10% while SanDisk held on to every penny of that fresh buyout premium.