WSJ : Western Digital in Advanced Talks to Merge With Kioxia in $20 Billion-Plus

Western Digital in Advanced Talks to Merge With Kioxia in $20 Billion-Plus Deal
Stock deal could be finalized as early as the middle of September, according to people familiar with the matter

Western Digital Corp. WDC 7.80% is in advanced talks to merge with Japan’s Kioxia Holdings Corp., according to people familiar with the matter, in a deal that could be valued at more than $20 billion and further reorder the global chip industry.

Long-running discussions between the companies have heated up in the past few weeks and they could reach agreement on a deal as early as mid-September, the people said. Western Digital would pay for the deal with stock and the combined company would likely be run by its Chief Executive, David Goeckeler, the people said.

There’s no guarantee Western Digital, which had a market value of around $19 billion Wednesday afternoon, will seal an agreement, and Kioxia could still opt for an initial public offering it had been planning or another combination.

The Wall Street Journal reported in March that Western Digital and Micron Technology Inc. MU 2.86% were examining potential deals with Kioxia, which makes NAND flash-memory chips used in smartphones, computer servers and other devices. Micron’s interest has since cooled and Kioxia has been focused on discussions with Western Digital, which already has deep existing ties with the Japanese company.

Any transaction would require the blessing of the Japanese government, given Kioxia’s significance there and the political sensitivities of transferring ownership of such key technology. Washington would also likely play a role, but a deal could fit with a push by the U.S. to boost its chipmaking capabilities and increase competitiveness with China.

Perhaps the biggest regulatory hurdle would be China, which has been increasingly aggressive in its antitrust enforcement, helping scuttle potential deals including Qualcomm Inc.’s proposed $44 billion purchase of Dutch chip maker NXP Semiconductors NV in 2018.

There has been a burst of acquisition activity among chip makers, with the industry accounting for several of the biggest deals of the past few years. Those include Advanced Micro Devices Inc.’s roughly $35 billion purchase of Xilinx Inc., Nvidia Corp.’s roughly $40 billion buyout of SoftBank Group Corp. -backed Arm Holdings and Analog Devices Inc.’s $20 billion acquisition of Maxim Integrated Products Inc.

In a sign of how difficult it can be to get such deals across the finish line, Nvidia last week said getting approval for its proposed purchase of Arm has progressed only slowly. U.K. regulators are assessing whether to give their blessing to a deal that also still needs approval from other governments. China only just recently approved Analog’s purchase of Maxim, more than a year after the deal was first struck.

Intel Corp. meanwhile, has made clear it is interested in acquisitions and has explored purchasing GlobalFoundries Inc. The chip-production firm, owned by an investment arm of the Abu Dhabi government, is planning an IPO and has so far been unreceptive, however.

(Intel last year agreed to sell most of its memory-chip business to South Korea’s SK Hynix Inc. )

Demand for memory chips has been hot, lifted by new smartphone launches, 5G expansion and demand for PCs and servers. Samsung Electronics Co. , the world’s largest memory-chip maker, last month said roaring demand helped offset weakness in smartphone shipments. In a reflection of the demand, flash-memory prices have shot up in recent months.

That has helped Kioxia’s valuation since it backed away from a planned IPO last fall, citing the coronavirus pandemic and market volatility. It was expecting a valuation then of around $16 billion.

Western Digital, which makes hard disk drives, solid-state drives and NAND chips, has a joint venture with Kioxia for manufacturing and research and development that was set to expire starting in 2027. That agreement appears to have given Western Digital a leg up on Micron, which has a market value of $83 billion and could have more easily pulled off a full takeover.

Their existing ties could help make a WD-Kioxia combination more palatable to regulators.

Western Digital shares rallied on the news that it was exploring a deal with Kioxia, closing up 7.8% Wednesday at $65.50 after the Journal’s report on the talks. That could indicate shareholders are supportive despite what a large bite it would be.

Kioxia, formerly part of Toshiba Corp. and known as Toshiba Memory, was purchased in 2018 by a group led by private-equity firm Bain Capital that included Apple Inc., Dell Technologies Inc., Kingston Technology Co. and Seagate Technology PLC, for around $18 billion. Toshiba retained a 40% stake in the business, which was renamed Kioxia the following year.

FT : Wavering US investors cut leverage for first time since the start of the pa

Wavering US investors cut leverage for first time since the start of the pandemic
Borrowings to buy securities dipped from record $882bn to the lowest level since March

Investors in the US have started to dial back their use of leverage for the first time since financial markets were rattled by the coronavirus last year, removing some of the borrowed money that has fuelled the market rally since last year.

Investors had borrowed $844bn against their portfolios in July, down from a record $882bn a month earlier and the lowest level since March, according to data collected by Wall Street’s self-regulatory body, the Financial Industry Regulatory Authority.

Separate data from Goldman Sachs, which runs one of the largest prime brokerages in the world, showed that the investment bank’s hedge fund clients had cut both net and gross leverage in recent weeks. Morgan Stanley has also seen long-short equity hedge funds that trade through it reduce their leverage, while bankers at other large New York-based prime brokers said a similar trend was under way.

Finra does not publicly disclose who is driving the shifts in leverage each month, and it was unclear if the many retail investors who began day trading during the pandemic have also curtailed their use of margin loans. More comprehensive data from the Federal Reserve on hedge fund leverage is not yet available.

Interactive Brokers, which serves 1.5m customers, disclosed this month that margin loan balances among its clients had declined 2 per cent in July from the month before to $47.9bn. At Charles Schwab, margin balances in July rose by the smallest pace since the retail broker began disclosing the figure on a monthly basis this year, although it still hit a record of $79.9bn.


Mark Aldoroty, who runs prime services for Pershing, a division of Bank of New York Mellon, said fund managers had less faith in how the market might trade in the months ahead.

He pointed to the unexpected move by Chinese regulators to tighten their grip over both the technology and education sectors, which wrongfooted funds that owned Chinese stocks. The swings in US stocks in recent weeks, as economic data has broadly fallen short of expectations, has also shaken investor confidence in the rally.

“You have to start thinking, ‘My conviction might be right, but does it matter?’” Aldoroty added. “Because of the way the market has traded, it’s not necessarily that pure fundamental research drives decisions any more.”

The losses on Chinese tech stocks have been particularly painful for large hedge funds. The Nasdaq Golden Dragon China index has fallen just over 46 per cent from an all-time high set in February.


In an analysis of 813 hedge funds with nearly $3tn of gross equity positions, Goldman Sachs noted that a third held Chinese stocks at the start of the third quarter, with many making large bets on one: Alibaba. The company was among the 10 largest holdings at Bridgewater, the world’s largest hedge fund, and was also a sizeable stake at Tiger Global Management and David Tepper’s Appaloosa Management at the end of June, according to filings with the Securities and Exchange Commission.

Many large hedge funds cut their stakes in Chinese securities during the second quarter, given the share price declines.

In the US, the economic picture has also grown hazier, as coronavirus cases have surged and economic indicators such as consumer sentiment and manufacturing indices have showed a cooling trend.

The reduction in borrowing follows a stellar run for US stocks, with the benchmark S&P 500 index up 19.7 per cent so far this year. The rise has been supercharged by economic stimulus out of Washington. But the fact that many investors have bought into the market with borrowed money has raised red flags for regulators, particularly given the limitations of data that do not capture some trades involving swap derivatives.

It was a point crystallised by the implosion of Archegos Capital Management in March. The investment group’s soured bets resulted in more than $10bn in losses for its trading counterparties including Credit Suisse and Morgan Stanley. And the fact the investment group used total return swaps, instead of buying the stocks outright, meant regulators had little insight into brewing troubles.

The Federal Reserve warned in May that the tools it and other regulators had to gauge hedge fund leverage “may not be capturing important risks”. Many hedge funds also use options to magnify returns.

Banks have tightened the terms of margin lending with some clients after the Archegos affair, requiring some hedge funds to post additional collateral, according to bankers at several large dealers. But the bankers said those reviews were mostly undertaken months ago and were not driving the recent decline in leverage.

Trading activity has also moderated in the months since Archegos captivated Wall Street, including in many of the stocks that had been propelled by new retail traders who had taken to free apps such as Robinhood to try their hand in markets for the first time.

“There was a certain level of aggressiveness in the trading early this year that made people more willing to make levered bets,” said Steve Sosnick, chief strategist at Interactive Brokers. “Now the levels of margin we are seeing seem to be less about speculating via margin, and more about investing via margin.”

He added: “The levels of participation we were seeing at the start of the year were unprecedented, and probably unsustainable.”

>>> US After Hours Summary: ZUO +14%, WSM +13% rise while SLQT -17%, LCI -11% de

After Hours Summary: ZUO +14%, WSM +13% rise while SLQT -17%, LCI -11% decline on earnings/guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: ZUO +13.9%, WSM +12.8% (also increased quarterly dividend and approved new $1.25 bln stock repurchase authorization), PSTG +9.6%, ULTA +5.2%, SNOW +4.0%, NTAP +2.7%, SPLK +2.6%, ESTC +2.6% (also agreed to acquire Cmd), CRM +2.5%

Companies trading higher in after hours in reaction to news: AMRX +14.1% (reported top-line results from Phase 3 RISE-PD trial), ABM +2.7% (agreed to acquire Able Services), HEXO +1.2% (received shareholder approval for Redecan transaction), ADI +1.0% (increased share repurchase authorization to approx. $10 bln)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: SLQT -17.1%, LCI -11.3%, ADSK -6.6%, GES -2.7% (also increased share buyback authorization to $200 mln), BOX -2.5%, RAVN -1%

Companies trading lower in after hours in reaction to news: SMED -6.9% (announced public offering of common stock), RMBL -2.1% (announced public offering of Class B common shares), ON -2.1% (agreed to acquire GT Advanced Technologies), FOXA -1.2% (announced strategic investment in Eluvio)

FT : Distressed debt funds sparkle in Covid recovery

Distressed debt funds sparkle in Covid recovery
Rapid return to form for struggling companies makes troubled debt specialists stand out

Hedge funds that seek to profit from stricken companies are enjoying their best year since the aftermath of the financial crisis as the stimulus-driven market rally boosts the price of debt that had been skirting with default.

Distressed debt funds — specialists in picking up bonds and loans issued by companies in trouble — made their tenth consecutive month of gains in July, extending returns for the year to the end of July to 11.45 per cent.

The run is the strongest over the same period since 2009 and marks the best performance of any major hedge fund strategy of 2021, according to data provider Eurekahedge.

The outperformance underlines the speed of the economic recovery from the worst of the pandemic, which has been aided by huge stimulus from central banks allied with rapid vaccination programmes in the rich world.

Debt funds typically place short-term punts on near-default or defaulted bonds, make emergency loans, or even take control of stricken borrowers through the courts.

“We had the start of a distressed cycle when Covid hit, with a big increase in default rates, but this corporate cycle is playing out very differently from the past,” said Giuseppe Naglieri, deputy chief investment officer at Värde Partners, a $15bn distressed debt fund. 

Firms in this space, including Oaktree Capital, Strategic Value Partners, Apollo and Elliott Management, tend to dive in when economies are in recession and markets are turbulent, and then hope to ride the recovery — a lucrative if risky bet. 

The strategy has played out rapidly over the past year-and-a-half, thanks to the dramatic market recovery engineered by aggressive central bank action and government spending sprees.

In addition, private equity firms have stepped up, using their money to buttress companies that they are invested in, indirectly helping distressed debt funds along the way, Naglieri said. 

Private equity firms tend to load companies with a lot of debt to increase their returns, but that can lead to problems when recessions strike. Sometimes they walk away from an investment rather than doubling down, but that has changed recently, the Värde partner noted.


“The big difference is in the provision of liquidity, and not just in terms of central banks and governments,” Naglieri said. “The willingness of shareholders to support their companies has been greater than in past cycles — perhaps driven by the fact that it was caused by a virus, so it was assumed to be temporary.”

HFR, another industry data provider, pins the average distressed debt returns at 13.9 per cent in the year to the end of July, compared to the average hedge fund returns of 9.5 per cent. Last year, distressed debt players returned 11.8 per cent.

Among the winners are Jason Mudrick’s Mudrick Capital Management and Victor Khosla’s Strategic Value Partners, whose distressed debt hedge funds had notched up returns of 26.2 per cent and 15.5 per cent in the year up to the end of May, according to investor documents seen by the FT. 

Returns have been buoyed by a remarkable rally across corporate debt markets, which has lowered borrowing costs across the board and even helped even companies such as cruise lines, air carriers and hotel groups raise billions of dollars to tide them over. 

The average yield of US junk bonds has collapsed from a peak of more than 11 per cent at the height of the coronavirus market ructions last year to under 4 per cent for the first time on record this summer, according to ICE data. Even the pre-financial crisis low was about 7 per cent. 

The average yield of corporate bonds graded CCC or lower by the major credit rating agencies — extremely risky debt already on the cusp of default — has tumbled from a March 2020 high of almost 20 per cent to near an all-time low of about 7 per cent this summer. Oleg Melentyev, head of high-yield bond strategy at Bank of America, describes the current environment as “credit nirvana”.


However, the credit market rally has helped a lot of companies that might otherwise have fallen into the clutches of distressed debt funds, limiting the range of further opportunities. Some investors are also looking elsewhere for returns, thinking that the best days for the distressed debt strategy may be over.

UBS’s hedge fund investment unit said in its third-quarter strategy outlook that it planned to trim its exposure to distressed debt, “given the material rally across corporate credit and more attractive long-biased opportunities in other segments of the credit market”. 

Preqin, a data provider on private markets, also noted in its latest outlook that “investors have cooled their interest in distressed debt and special situations compared to last year as opportunities proved harder to come by than expected”. 


However, many distressed debt specialists stress that they raise and deploy money steadily in good times and bad, and remain confident that there will be plenty of opportunities from the aftershocks of the coronavirus pandemic. 

“There is more to do than meets the eye,” Naglieri said. “When you look at the average of the market, it doesn’t look very interesting. But when you dig deeper into individual companies and sectors, there is actually quite a lot going on.”

FT : Regulators Scrutinize a Robinhood Marketing Ploy: Free Shares

Regulators Scrutinize a Robinhood Marketing Ploy: Free Shares
Online broker faces backlash from companies, scrutiny from regulators over cost of delivering proxy materials to millions of new shareholders

WASHINGTON— Robinhood Markets Inc. HOOD 9.03% has for years given customers a free share of stock for opening an account or referring friends. The practice could soon cost the online brokerage a lot more money.

Brokerages like Robinhood are required to deliver proxy materials to a public company’s shareholders ahead of annual meetings. They are then reimbursed by the public company for the cost of distribution.

This means that Robinhood’s stock giveaways have saddled some companies with larger bills for delivering proxy statements. Now, the practice is sparking a backlash from companies and scrutiny from market regulators.

One company pushing back is Florida-based drugmaker Catalyst Pharmaceuticals Inc., CPRX -1.93% which says Robinhood’s program cost it more than $200,000 last year and could be even more expensive this year.

“Catalyst has become aware that Robinhood has been giving away shares of Catalyst’s common stock at no charge as part of its promotional program,” Catalyst Chief Executive Patrick McEnany wrote in a June comment letter to the Securities and Exchange Commission. “Catalyst believes that there are likely numerous companies facing this same issue, and that the costs of distributing materials to small stockholders under these circumstances is onerous and unreasonable.”

Following this and other letters, on Aug. 13, the SEC approved a proposed rule change from the New York Stock Exchange that prohibits brokers from seeking reimbursement from companies for delivering proxy materials to investors who received shares from their broker at no cost.

The new rule won’t immediately affect Robinhood, which isn’t a member of the NYSE.

But companies are now urging the Financial Industry Regulatory Authority, or Finra, which oversees brokers including Robinhood, to pass a similar rule change.

“We don’t expect the reimbursement exemption to impact us significantly, even if it were to be adopted by other regulators,” a Robinhood spokesman said. “Customers love our free-stock program and we think it fits squarely into our mission to democratize finance for all.”

If Finra follows the NYSE’s lead in barring Robinhood from seeking reimbursement, it would be the latest in a string of regulatory actions targeting the fast-growing broker’s business practices.

Earlier this year, Finra fined Robinhood nearly $70 million to resolve allegations that it misled customers, approved ineligible traders for risky strategies and didn’t supervise technology that failed and locked millions out of trading. Separately, the SEC is reviewing Robinhood’s and other brokers’ practice of sending customers’ stock orders to high-speed trading firms in exchange for cash—a practice known as payment for order flow.

Last fall, Catalyst learned that the number of people who owned its stock had soared over the previous year to 280,000 from 25,000. The 74-employee company received a bill from a Robinhood service provider for $234,000 to cover the costs of sending out proxy materials to investors ahead of its 2020 shareholder meeting, up from $12,500 in 2019.

Another company, Marathon Oil Corp. MRO 2.74% , discovered that its shareholder ranks increased nearly 32-fold from 2019 to 2020 and that its proxy-distribution costs were 25 times higher.

Both companies launched investigations to determine the cause. They found that most of the new investors held tiny stakes through Robinhood.

As one of its main marketing strategies, Robinhood randomly assigns a free share to users who link a bank account for the first time or refer a friend to its app. Robinhood users claimed $78.7 million in shares under the program in 2020, up from $29.4 million in 2019, as its customer base swelled during the coronavirus pandemic.

While the stocks are selected randomly from Robinhood’s inventory and might be valued as high as $225 a share, customers have a 98% chance of receiving a share priced between $2.50 and $10, the broker says.

In Marathon’s case, its shareholder ranks surged after its stock price fell to $3.12 from more than $13 between the start of 2020 and late March that year, as the pandemic battered energy companies. In other words, the company said, a falling share price ended up leading to “extraordinarily high” proxy-related costs at a time when it needed to cut expenses.

“Not long after MRO became aware of this correlation, an MRO employee saw a Facebook advertisement offering free shares of stock upon opening a Robinhood account,” Marathon General Counsel Kim Warnica wrote in an April comment letter to the SEC, using the firm’s ticker symbol. “Additionally, the Corporate Secretary’s office was made aware of two individuals who received a free share of MRO stock as a result of the Robinhood program.”

Securities lawyers say it is common for Finra to follow the NYSE’s lead on proxy-related issues, given that the exchange hosts a large number of public companies.

A Finra spokesman said the agency is reviewing the SEC’s decision.

An SEC spokeswoman didn’t respond to a request for comment.

>>> US Gapping down

Gapping down
In reaction to earnings/guidance:

  • JWN -11.8%, KC -8.6%, URBN -4.5%, LMNR -3.2% (guides JulQ EPS and revenue below consensus), HEI -0.8%

Other news:

  • SAVA -23% (citizens petition filed; co responds to allegations, believes claims are misleading)
  • HUGE -12.2% (to terminate its Phase 2 clinical trial of FSD-201)
  • RIOT -2.6% (files for 11.8 mln share offering by selling shareholder)
  • SAIA -2.5% (to join S&P MidCap 400)
  • PRPL -2% (CFO stepping down)

Analyst comments:

  • SAM -3.4% (downgraded to Underperform from Market Perform at Cowen)
  • CAE -2.2% (downgraded to Underperform from Neutral at BofA Securities)
  • CPB -1.1% (downgraded to Neutral from Overweight at Piper Sandler)

>>> US Gapping up

Gapping up
In reaction to earnings/guidance:

  • SCSC +5.8% (also announces new $100 mln share repurchase auth), INTU +2% (also increases dividend by 15%), TOL +1.9%, PLAB +1.3%, VNET +1.2%, SCVL +1.2%, RY +0.8%, ATHM +0.5%

Other news:

  • BLFS +9.5% (to join S&P SmallCap 600)
  • ICLK +8% (board of directors has approved to upsize the share repurchase program announced on December 10, 2020 by $10 mln from $15 mln to $25 mln)
  • OPCH +7.7% (to join S&P MidCap 400)
  • TRMK +6.9% (to move to S&P SmallCap 600 from S&P MidCap 400)
  • MIME +5.2% (to join S&P MidCap 400)
  • SJ +3.8% (partners with global friendship exchanges foundation to build a dedicated tech team for artists)
  • FGEN +3.2% (topline results from WHITNEY, the Company's Phase 2 clinical study of roxadustat for the treatment of chemotherapy-induced anemia)
  • IBIO +3.2% (signed a definitive worldwide exclusive license agreement with RubrYc Therapeutics for RTX-003)
  • LMPX +3% (to acquire dealership; expected to add $0.12/sh in 2022)
  • GHM +2.9% (awarded over $20 mln in orders to date for 2Q22)
  • FLXN +2.6% (expands Phase 1b Trial Investigating FX301)
  • CNK +1.8% (to move to S&P SmallCap 600 from S&P MidCap 400)
  • AVT +1.5% (increases dividend)

Analyst comments:

  • CATB +4.6% (upgraded to Buy from Neutral at H.C. Wainwright)
  • OKTA +2.7% (upgraded to Strong Buy from Outperform at Raymond James)
  • KRG +2.5% (upgraded to Strong Buy from Outperform at Raymond James)
  • UNVR +2.2% (upgraded to Buy from Hold at Berenberg)

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • BLFS +10.8%, OPCH +7.2%, MIME +5.5%, VNET +4.7%, TRMK +4.5%, ZME +3.9%, SJ +3.8%, TOL +3.2%, LMPX +3%, GHM +2.9%, PLAB +2.9%, INTU +2.3%, HYZN +1.5%, AVT +1.5%, SCSC +1%
  • Gapping down:
    • SAVA -18.1%, HUGE -12.8%, JWN -10.7%, URBN -4.1%, SAIA -3.8%, RIOT -3.7%, LMNR -3.2%, ALIT -2.4%, PRPL -2%, HEI -0.6%, ULH -0.5%

FT : Brazil’s ‘third way’ candidates gear up to challenge Bolsonaro

Brazil’s ‘third way’ candidates gear up to challenge Bolsonaro
Choice beyond hard right’s radicalism and left’s corruption scandals in next year’s polls

With just over a year until presidential polls, Brazil’s political landscape is increasingly dominated by two polarising figures: incumbent hard-right leader Jair Bolsonaro and former leftwing president Luiz Inácio Lula da Silva.

The stark choice between the two men has prompted a push by moderates to establish a “third way” candidate — a centrist who can appeal to voters disillusioned with the radicalism of the far right and the history of corruption under Lula’s Workers’ party.

“Brazil urgently needs a project for the country. The third way should start not from personalities, but from the identification of agendas that are not represented by either [Lula or Bolsonaro],” said Alessandro Vieira, a senator with the centrist Citizenship party.

The movement, however, still lacks a single breakout star to unify supporters. Given that both Lula and Bolsonaro can depend on loyal support bases, a wide field of third way candidates would split the vote and reduce the chance of any centrist progressing to the runoff in Brazil’s two-round voting system.

Here are the key figures positioning themselves to become the “neither Lula nor Bolsonaro” candidate ahead of party primaries early next year.