Western Digital: unsolid state  

A juicy target despite the risks
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Private equity has repeatedly swooped on technology companies this year. Western Digital’s lowly valuation makes it look like future prey. The data storage company’s shares surged more than 10 per cent on Wednesday after it offered improved profit forecasts; still, they have fallen a third in a year. It now trades at an enterprise value of about 5 times forecast earnings before interest, tax, depreciation and amortisation, a very low multiple among tech companies in the S&P 500. 

There are plenty of off-putting facts to consider. Sales of PCs, which use Western Digital’s storage, are declining. Goldman Sachs foresees crumbling margins in NAND-type flash memory. Analysts also find it suspicious that the company has said nothing about a big contract with Samsung, which was due to expire last month. Private equity stumbled badly with previous big tech component deals, for chipmakers Freescale and NXP before the crisis.

Moreover, it is only four months since Western Digital acquired storage rival SanDisk for about $14bn. The deal transformed Western Digital from a cash-rich tech company to one with net debt of more than $8bn. So much debt was needed after Tsinghua Unigroup abandoned a plan to invest $3.8bn in Western Digital.

Messy. The question for a potential acquirer — or a public market investor — is whether the profits will stay strong enough to support that debt load and allow Western Digital to prosper. Forecasts for ebitda range from $3.5bn to $4.5bn for 2017 and from $3.8bn to $5.4bn in 2018, according to Bloomberg data. That is an uncomfortably broad spread. 

But take the most pessimistic view: add a 30 per cent buyout premium to Western Digital’s battered share price and use 75 per cent debt in the deal. Doing this creates an enterprise value of 8 times 2017 ebitda. Debt would be touching 6 times ebitda, a critical threshold for risk-averse regulators. For all the untidiness, do not be surprised if buyout firms are hovering.

Email the Lex team at lex@ft.com

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