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Elliott/ Western Digital: private equity megafunds leave tech laggards vulnerable

In a battered market for technology stocks there may be hope: call it the “private equity put”.

On Tuesday, Elliott Management disclosed a $1bn — or roughly six per cent — stake in Western Digital, the maker of hard drives and flash memory devices. Elliott urged Western to break up those two halves of its business which came together from Western’s $19bn acquisition of SanDisk in 2016.

Most intriguingly, Elliott said it would be willing to put another $1bn into the separated flash unit while also signalling other private capital investors were likely to be interested in some other transaction involving that business.

The move comes as specialist firms such as Elliott, Thoma Bravo, Vista and Clearlake have collectively raised tens of billions in buyout funds. High-profile companies such as Anaplan and Citrix have announced go-private transactions this year valued in excess of $10bn each. Hedge funds are attuned to all the private equity dry powder (cash) waiting to be deployed, so expect more activists to push tech laggards into selling themselves.

Western Digital is hardly a high-flyer. With an enterprise value of roughly $20bn it trades at just above 1 times revenue even as it boasts a gross profit margin of more than 30 per cent. Elliott’s analysis shows that when Western’s hard drive business is stacked against arch-rival Seagate, the implied residual valuation of the flash memory segment is just 0.4 times revenue. Elliott argues that this flash business deserves a value of as much as $20bn by itself. That figure, if realised, would double Western’s current share price.

There are several possible merger and buyout possibilities for the pieces of Western including a long-rumoured tie up with Kioxia Holdings, the former Toshiba flash business now owned by Bain Capital. Western’s management is new enough to perhaps welcome Elliott’s arrival. Other tech targets of shareholder activism may have less enthusiasm. Still they may be hard-pressed to deflect buyout offers when public market trading values remain so depressed.

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