ISS Endorses Western Digital-SanDisk Merger: What It Means For Shareholders

Institutional Shareholder Services (ISS), a leading independent proxy advisory firm, has recommended shareholders of Western Digital Corp WDC to approve the proposed acquisition of SanDisk Corporation SNDK. UBS analyst John Roy analyzed what it could mean for the shareholders.

In its statement to clients, ISS said, "Support FOR the proposed merger is warranted given the strategic rationale—including complementary product lines, a doubling of the addressable market, and the ability to transition Western Digital beyond its core but declining HDD business—as well as synergies of $1.1 billion, expected earnings accretion within 12 months of closing, and the ability to adjust the cash component of the merger consideration if necessary to maintain financial flexibility."

"SanDisk acquisition would transform Western Digital. We estimate adding SanDisk could add $1.58 to F18 EPS, moving up from $5.62 to $7.20. The key open question is the 3D NAND technology of SanDisk—will they be able to keep up with Samsung," Roy wrote in a note to clients.

With SanDisk, Western Digital would move from a supplier of a declining storage component (HDDs) to a supplier of the rising storage component (SSDs). Roy, who has a Neutral rating on WDC with a $45 price target, said though there will be execution risks, this is the right strategy. The combined company is expected to achieve full annual run-rate synergies of $500 million within 18 months post-closing, and these synergies are expected to increase to approximately $1.1 billion by 2020. Shares of WDC were up 4 percent and SNDK rose 2 percent.