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How Will SanDisk Reduce the Cost for Western Digital?

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Cost synergies

Talking about synergies that the SanDisk (SNDK) merger will bring to Western Digital (WDC), cost is the most important factor. It can give the combined company an advantage over its competitors in the highly commoditized hard disk market.

According to Western Digital, the merger will generate full annual run-rate cost synergies of ~$500 million within 18 months from the date of the completion of the deal. The deal will be complete in the June 2016 quarter. The company expects these cost synergies to increase to $1.1 billion by 2020 as the consolidation starts generating results.

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Cost of Sales

Since it’s a vertical integration, Western Digital will save on the cost it paid to procure NAND (negative AND) for SSD (solid-state disk). This will generate maximum savings of $200 million over 18 months and $750 million by 2020.

Alken opposed that enterprise SSDs only accounted for 7% of Western Digital’s revenue in 2015. A price of $17 billion isn’t worth it for such small synergies. However, it didn’t note that the merger will increase SSD’s contribution to Western Digital’s revenue to 32%. In light of this change, a $200 million cost synergy would be fruitful. It would be reflected in the combined company’s gross margin.

A similar vertical integration happened when Micron Technology (MU) acquired its Taiwan (EWT)-based dynamic random-access memory supplier Inotera for ~$3.2 billion.

Operating expenses

The overlap of products and customers between SanDisk and Western Digital would help reduce $180 million in operating expenses over the next 18 months and $225 million by 2020.

  • Fixed and variable costs would reduce by $55 million in 18 months and $90 million by 2020.
  • Research and development costs would reduce by $70 million in 18 months and $75 million by 2020.
  • Selling and distribution costs would reduce by $55 million in 18 months and $60 million by 2020.

All of these synergies would be accretive to adjusted earnings per share in 2017. A similar merger between Avago (AVGO) and Broadcom is expected to result in cost synergies of $750 million over the next 18 months. The combined company has a comprehensive portfolio of communication semiconductors.

In the next part, we’ll discuss how the SanDisk merger will impact Western Digital’s balance sheet.

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