Western Digital's SanDisk Merger Up In The Air On Wall Street

Western Digital Corp WDC's planned acquisition of SanDisk Corporation SNDK is now in the hands of Western Digital shareholders after Chinese state-backed holding group Unisplendour dropped out of the deal.

Unis faced regulatory pressure from the Committee on Foreign Investment in the United States.

Wall Street analysts saw the development as a potential win for Western Digital, noting the company could exit the deal for a minimal cost or renegotiate a lower price for SanDisk. Western Digital shareholders can vote against the deal, and 2.21 percent shareholder Alken Asset Management has already indicated it would oppose the buy.

Western Digital Has An Out

Moskowitz offered an analysis of the SanDisk acquisition agreement, noting that since Unis left the deal, if Western Digital's shareholders vote against the merger, the company can pay a $184 million fine to exit the deal. He offered the company an Equal Weight rating and a price target of $61.

Jeffries analyst James Kisner reiterated a Buy rating and $77 price target for Western Digital, noting that without Unis' investment, the company's CY16 earnings estimate increases from $6.15 to $6.89. He wrote "We believe the current valuation offered by WDC shares is compelling both with and without a combination with SNDK."

Macquarie's Deepon Nag felt similar to Moskowitz, seeing an out for Western Digital. Nag felt that Alken's early indication of a no vote gives Western Digital leverage in the deal.

"The SanDisk deal will most likely be dilutive" for Western Digital, Nag wrote. Nag analyzed nearly 300 tech mergers and acquisitions in the past 30 years and found that about 10 percent of them are renegotiated to lower the price. "As a result, we believe that WDC will be highly motivated to renegotiate the price of SNDK lower," Nag concluded.

As an aside, Nag noted "the CFIUS decision demonstrates a heightened sense of scrutiny on all Chinese investments in U.S. tech IP."

Nag offered a Neutral rating and $70 price target.

Deal "Makes Sense," But At What Price?

PacCrest analyst Monika Garg wrote that she sees "risk to the SanDisk deal," writing that she understands the "midterm and longer-term strategic rationale, but given recent underperformance of WDC shares and tightening debt markets, we see risk to deal approval by WDC shareholders."

Garg thinks a nay vote will have downside for SanDisk, sending its price down to $55.

Barclays' Mark Moskowitz said that the SanDisk buy "makes strategic sense, but it needs to be at the right price. [SanDisk's] implied premium appears to be too high relative to other semiconductor deals."

UBS' Stephen Chin offered a Neutral rating and $86 price target. Chin did not change his estimates, but noted that the $184 million fine Western Digital stands to pay if it exits the deal pans out to about $1 per share for SanDisk.

SanDisk investors seemed encouraged by the prospect of either the deal or the fine, with shares up under 1 percent by late morning Wednesday.

Western Digital shareholders seemed less excited. The stock ticked slightly upward Wednesday, but without noticeable price action after falling sharply Tuesday.