Shares of Western Digital (NASDAQ:WDC) are up over 10% today after Elliott Management penned a 13-page letter to the company’s board proposing a company split. Elliott has a roughly $1 billion stake in WDC stock, which equates to about 6%. That makes it one of the company’s largest shareholders.
Per the letter, the private equity firm believes that a separation of Western Digital’s hard disk drive (HDD) and flash memory businesses could propel WDC stock to $100 by the end of 2023. That would represent upside of almost 100% from yesterday’s closing price of $53.92. In the letter, Elliot also offers to provide the company with at least $1 billion for its flash business to be used for a “spin-off transaction or as equity financing in a sale or merger with a strategic partner.” The $1 billion would be provided at a flash business enterprise value of between $17 billion and $20 billion.
With that in mind, let’s jump into the details of the letter.
Why Is WDC Stock Up Today?
Elliott believes that Western Digital is one of the two dominant players in the HDD industry. In 2016, Western Digital entered the flash industry by acquiring SanDisk for $19 billion. However, based off “nearly six years of performance” since the acquisition, Elliott has concluded the following:
“Western Digital has underperformed its strategic aspirations, and investors’ profound lack of confidence in the Company is evident in the extraordinary discount at which they value its stock.”
Elliott points out that Western Digital has consistently lost market share in the HDD industry. Meanwhile, pure-play competitor Seagate (NASDAQ:STX) has gained share. Western has also lost market share in the flash industry. Samsung is number one in the industry and sold its HDD business to Seagate in 2011. Finally, Elliott points out that competitors Micron (NASDAQ:MU) and SK Hynix have strayed away from the HDD industry as well. Instead, the two focus on “complementary” technologies like dynamic random access memory (DRAM).
To summarize, Elliott believes that Western Digital is well-positioned in the HDD and flash industry. However, ownership of the two businesses “has not created tangible strategic benefits, but rather significant detriment.”
Elliott has called on the company’s board to “conduct a full strategic review of these ideas.” The firm has also proposed a meeting with the board to discuss the details.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.