SK hynix faces dilemma over U.S.-Japan NAND Alliance

South Korea’s SK hynix Inc., which holds the key to the planned merger between Japanese memory chipmaker Kioxia Holdings Corp. and its U.S. peer Western Digital Corp. (WD), has yet to convey its consent for the merger to Kioxia, according to industry sources on Monday.

SK hynix is known to indirectly hold a 20 percent stake in Kioxia, making the Korean chipmaker’s approval essential for the merger to proceed.

According to Nikkei and other foreign media outlets, Kioxia and WD are making final adjustments to integrate their operations with the goal of making an announcement as early as the end of this month. The likely plan is for WD to spin off its semiconductor memory business and form a holding company with Kioxia Holdings.

The final investment ratio for the holding company is expected to be 49.9 percent for Kioxia and 50.1 percent for WD. Kioxia is expected to retain control of the company, which will be headquartered in Japan.

If the two companies merge, their NAND market share will become similar to that of Samsung Electronics Co., the global leader, likely posing a challenge to the Korean tech giant. The merger would also make it harder for SK hynix to regain its position as the second-largest player in the market.

For this reason, SK hynix was initially reported to have opposed the merger, but the situation that the chipmaker faces is not as straightforward. The biggest concern is cash, with Kioxia and WD aiming to go public after the merger and Bain Capital LP, which is part of the Kioxia consortium, wanting to exit after the listing. SK hynix also stands to gain more than a few trillion won.

SK hynix recorded a net loss of 5.57 trillion won ($4.13 billion) in the first half of 2023 and he company significantly increased its borrowings to cover its liquidity shortage, with its total debt, which was 19 trillion won at the end of 2021, increasing to 33 trillion won as of the first half of 2023. Under these circumstances, a successful sale of its Kioxia stake would replenish its cash reserves.

Another positive factor for SK hynix is that the merger will reduce the risk of extreme competition.

The industry is closely watching SK hynix’s earnings announcement scheduled for October 26. If the company has a more positive business outlook than the market expects, it is likely that the company will oppose the Kioxia and WD merger and start to hold out. However, if the outlook is less favorable, there is a possibility that the company will vote in favor of the deal to secure cash. SK hynix is expected to express its opinion on the deal during a conference call following the earnings announcement.

Even if SK hynix approves the merger, there are still variables to consider. The merger will need approval from regulatory authorities in various countries within two years of signing, and opposition from China is likely, as industry insiders predict that Chinese authorities might use approval for the merger as a bargaining chip after the U.S. presidential election in 2024.