Western Digital Shares Soar as Company Splits Off Flash Memory Business

Shares of Western Digital Corp. (WDC) surged more than 10% in early trading Monday before giving back some gains after the computer hard drive manufacturer said it would spin off its flash memory business.

The decision comes amid lower demand for flash memory chips that has led to a supply glut in recent quarters. Last week, Western Digital abandoned lengthy discussions of a merger with Kioxia, a Japanese memory drive maker, which is owned by a consortium led by Bain Capital and is the former semiconductor unit of Toshiba.

Western Digital’s decision to spin off its flash memory unit is a win for activist investor Elliott Investment Management, which last year advised the company to make such a move.

Western Digital Chief Executive Officer David Goeckeler said the two business units are “well-positioned to capitalize on the data storage industry’s significant market dynamics,” and, as separate companies, “will have the strategic focus and resources to pursue opportunities in their respective markets.”

The decision to separate the two units also “will unlock significant value for Western Digital shareholders,” Goeckeler said.

The company’s flash memory unit has struggled with a supply glut in recent quarters, due to lower demand for memory chips. Demand initially surged during pandemic lockdowns, as people bought more computers for personal use at home, but waned as offices reopened and leisure time fell.

Revenue for the company’s fiscal first quarter 2024, reported Monday, fell 26% from a year ago, with sales of hard disk drives (HDDs) tumbling 40%, while those of flash drives fell in the high single-digits.

Western Digital first ventured into the flash drive business in 2016, when it acquired SanDisk, a California-based manufacturer of flash memory cards, for $19 billion. The spinoff of the flash memory unit will effectively unwind that transaction.

Western Digital shares were nearly 8% higher around 3:30 p.m. ET, after surging more than 10% early in the session. They’ve risen by almost a third so far this year.

Analysts at Wedbush Securities assigned an “outperform” rating for WDC, and are eyeing a price target of $60 per share. That’s an almost 50% premium to the $41 share price as of Monday afternoon.

The Latest in a Wave of Spinoffs

Western Digital’s divestiture is the latest in a wave of spinoffs among corporations this year, with companies ranging from Intel (INTC) and BlackBerry (BB) to Kellogg and Johnson & Johnson (JNJ) spinning off parts of their business.

Rival chipmaker Intel earlier this month announced plans to operate its programmable chip unit as a separate company beginning in January, with plans to launch an initial public offering (IPO) of the unit within the next two to three years.

BlackBerry earlier this month said it will split off its Internet of Things (IoT) business, which is expected to go public early next year. Also in October, Kellogg split into two companies, Kellanova (K) and WK Kellogg (KLG), separating its snacks division from its traditional cereals unit.

In one of the biggest spinoffs of 2023, Johnson & Johnson split off Kenvue (KVUE), its consumer health-care division that makes and sells popular brands like Aveeno, Band-Aid, Tylenol, Benadryl, and Listerine, into a separate company.

Kenvue debuted as a public company in May, in an IPO priced at $22 per share, with Johnson & Johnson retaining ownership of all but roughly 10% of shares, but said at that time it intended to dispose of its majority stake in 2023, subject to market conditions.

Companies spin off parts of their business when they believe a unit could be more profitable as an independent company. The growth strategy of a unit could be incompatible with the rest of the firm, and prove to be a drag on the rest of the business. As a separate company, the unit could also be managed more effectively, as it receives more attention from new management.