China’s Mofcom Accepts to Integrate Substantial Portions of HGST and WD Subsidiaries

Western Digital  Corporation announced a decision from China’s Ministry of Commerce (MOFCOM), which enables the company to integrate substantial portions of its HGST and WD subsidiaries under Western Digital Corporation.

The agency’s decision is the result of an ongoing dialogue regarding the ‘hold separat'” restriction associated with Western Digital’s acquisition of HGST in March 2012. As part of the agreement with MOFCOM, and in order to leverage the storage industry heritage of each long-standing brand, Western Digital will continue to offer both HGST and WD product brands in the market and maintain separate sales teams for two years from the date of the decision.

“The decision announced positions us for continued growth and long-term value creation,” said Steve Milligan, CEO, Western Digital. “HGST and WD are an exceptional combination, and together, we will set the pace for innovation in this dynamic and evolving industry.”

Integration activities will begin immediately and are expected to continue over the next 24 months.

Western Digital expects the integration of corporate and other key functions, including R&D, heads and media operations, engineering and manufacturing, will result in significant opportunities for growth, synergies and cost savings consistent with the levels previously outlined by the company.

Q&A
 
1. What is the significance of the MOFCOM approval?
We have received approval from China’s MOFCOM to integrate substantial portions of our HGST and WD subsidiaries under Western Digital Corporation. This includes our corporate functions, R&D, heads and media operations, engineering, and manufacturing. This is an important step in our ongoing business transformation. Unifying HGST and WD under WDC will create new opportunities for innovation and efficiency which will provide even greater benefits to our customers and shareholders. We expect this integration will result in significant opportunities for growth, synergies, and cost savings.
 
2. What will be the impact to financial results of this integration?
As a result of MOFCOM’s decision as described in today’s announcement, we believe we will be able to realize approximately $400 million in annual operating expense savings with additional significant cost of goods sold savings. We believe it will take 12 to 24 months to achieve the vast majority of these savings. Now that we are able to engage in integration planning, we will look to provide more specifics on the integration during the first quarter of calendar 2016.
 
3. When will you provide your next update on integration and synergies progress?
We will provide periodic updates on integration, with the initial update coming in the first calendar quarter of 2016.
 
4. What are the specific parameters of the remaining hold separate conditions?
We will continue to offer both HGST and WD product brands in the market through two separate sales teams, as agreed with MOFCOM, and in order to benefit from the rich storage industry heritage of each long-standing brand. These restrictions will last for the next two years, at which time they automatically terminate.
 
5. Will both sales organizations be selling the full product line? Will you exit any product lines?
Each sales team will have the ability to offer a full line of products manufactured by the company under their respective brands.
 
6. Given the likelihood of improved cash flows post integration, will there be any changes to your capital allocation program?
There are no changes to the company’s capital allocation program at this time.
 
7. What will be the management structure of the integrated company?
Steve Milligan will continue to serve as CEO of Western Digital Corporation and oversee all business and corporate functions. Mike Cordano, formerly president of the HGST subsidiary, has been appointed president and COO of Western Digital by the company’s board of directors. In his new role, Cordano will head a business leadership team with balanced representation of proven leaders from the company’s two former subsidiaries. Jim Murphy, who previously served as president of the WD subsidiary, will lead the storage devices business unit, which includes the company’s HDD and SSD products. Jim Welsh and Dave Tang will lead the company’s content solutions and storage solutions business units, respectively. The executive appointments announced are effective immediately.
 
8. Will the company’s strategy change?
Our collective focus on operational excellence, innovation and creating value for customers and shareholders remains the same. The lifting of substantial portions of the ‘hold separate’ restriction enables us to accelerate initiatives focused on delivering value to our customers and shareholders.
 
9.  How will you integrate HGST and WD?
We have established a dedicated integration management office team to determine how best to combine the two entities so that we can begin to operate substantially as one company. This team is comprised of HGST and WD representatives from a range of sites and functional areas to ensure balanced representation and a global perspective.
 
10. When will the HGST and WD integration occur?
Integration planning activities will begin immediately; we expect integration will occur in phases over the next 24 months.