Toshiba may strike back as battle with Western Digital escalates

Toshiba is moving to block Western Digital employees from the flash-memory joint venture they share, after a threat of legal action by the US company.

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Toshiba will go forward with plans to shut out Western Digital’s workers from its flash memory facilities in Yokkaichi in central Japan as well as digital access to its networks (Source: Bloomberg)

Toshiba Corp. is moving to block Western Digital Corp. employees from the flash-memory joint venture they share, after a threat of legal action by the US company loomed over the increasingly bitter dispute over who gets to buy the Japanese company’s chip unit. Western Digital invoked an arbitration clause in their business agreement, which could postpone a sale. Later on Monday, Toshiba will go forward with plans to shut out Western Digital’s workers from its flash memory facilities in Yokkaichi in central Japan as well as digital access to its networks, people familiar with the matter said.

The escalating standoff between the two companies over the chip sale could imperil Toshiba’s plans to use cash from the divestment to plug a hole in its balance sheet from a massive loss in its nuclear power business. The US disk drive maker fears the operations may fall into the hands of competitors, even though it probably doesn’t have the financial wherewithal to buy the unit itself. At the same time, Toshiba needs to sell the chips business soon to avoid posting negative shareholder equity for two straight years.

Also Read: Toshiba warns Western Digital to stop interfering in chip sale

“Toshiba’s memory business is very appealing and has attracted a lot of potential buyers,” said Hideki Yasuda, an analyst at Ace Research Institute. “But Western Digital, just coming out of a major acquisition itself, simply can’t afford it, and must make the most out of its position as a joint venture partner to get to an outcome more favorable to itself.” Earlier this month, Tokyo-based Toshiba said that Western Digital still hasn’t signed a revised contract after becoming its flash memory manufacturing partner through the acquisition of SanDisk Corp. last year — and that it must comply by end of day Monday. It’s not clear how many Western Digital employees would be affected; SanDisk workers would continue to have access.

In preparation for the divestment, the Japanese technology company transferred ownership of the memory unit to a separate legal entity but didn’t get permission before doing so, according to Western Digital. The two should enter binding arbitration to resolve the dispute, Western Digital said. “We firmly believe that we provide Toshiba with the optimal solution to address its challenges and that we are the best partner to advance its legacy of technology innovation in Japan,” Western Digital Chief Executive Officer Steve Milligan said in a statement. “Toshiba’s attempt to spin out its joint venture interests into an affiliate and then sell that affiliate is explicitly prohibited without SanDisk’s consent.”

Western Digital executives have described Toshiba’s situation as “desperate.” (Source: Bloomberg)

Toshiba said it hasn’t received any notice of arbitration, and rejected claims that the process is in breach of the joint venture agreement. Toshiba said it will continue to handle the sale properly, and that Western Digital has “no grounds” to interfere with the process. Western Digital executives have described Toshiba’s situation as “desperate.”

Underscoring the need for Toshiba to secure a sale of the chip business, the company announced preliminary results for the year that ended in March showing a net loss of 950 billion yen ($8.4 billion). Shareholder equity was negative 540 billion yen for the year, and will be another 540 billion yen again in the current fiscal year unless a divestment happens, the company said. Toshiba is selling assets to contend with writedowns in its Westinghouse nuclear business, stemming from excessive costs and construction delays. The Japanese company put its Westinghouse Electric nuclear unit into Chapter 11 bankruptcy protection.

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Separately, utility owner Southern Co. has agreed to take the lead from Toshiba’s bankrupt US nuclear power unit on building two reactors at its plant in Georgia as soon as next month. Toshiba’s stock rose as much as 5.7 percent in Tokyo on Monday. Toshiba previously told Western Digital not to interfere in the sale plans and that it may take legal action. It also said the US company failed to formalize their relationship after Western Digital became its-flash memory manufacturing partner after the acquisition of SanDisk Corp. last year. Toshiba said the two companies must come to an agreement by May 15 or it would bar Western Digital employees from its facilities and networks.

Also Read: Toshiba said to place temporary hold on memory chip business

Arbitration will take place in San Francisco, Western Digital said. Each side will propose one member of the three-person panel. The third, who will serve as chairman, will be chosen by either the two other members or the International Chamber of Commerce, which will oversee the arbitration. The process can take as long as a year. Any move that undermines arbitration, such as a sale of the unit before the panel reaches a decision, could allow the issue to go to court.

The type of chip produced by the joint venture, known as flash memory, is enjoying a bumper year. Micron Technology Inc., Samsung Electronics Co. and SK Hynix Inc. have all reported strong demand for the product as the industry moves away from magnetic disks in computer storage. Toshiba’s sale has garnered significant interest, with preliminary bids as high as $26 billion from Hon Hai Precision Industry Co., Bloomberg reported last month. Other bidders include SK Hynix and Broadcom Ltd.