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By Yoshifumi Takemoto and Makiko Yamazaki
TOKYO (Reuters) - Western Digital and Japan's Kioxia Holdings have called off merger talks after failing to agree on terms, two people said on Friday, in the latest stumble for an on-again-off-again deal to create one of the world's largest memory chip makers.
The souring of the talks comes after South Korea's SK Hynix - a major Kioxia investor and rival to both the U.S. and Japanese companies - said just a day earlier it does not back the deal due to its impact on investment value.
Still, both sides remain interested in consummating the deal, the two people said. Merger talks between the two memory chip heavyweights have been off and on since 2021.
Even with the talks halted, representatives of both Western Digital and Kioxia, formerly Toshiba Memory, were working on the sidelines to iron out difficulties, including winning over Hynix, one of the people said.
The two people, who were familiar with the matter, did not wish to be identified because the information hasn't been made public.
The Nikkei business daily, which first reported the news, said the companies were also unable to agree on conditions with top Kioxia shareholder Bain Capital.
The combined company would control a third of the global NAND flash market, on par with top player Samsung Electronics, threatening the position of Hynix, the world's No. 3 maker of NAND flash memory.
Kioxia declined to comment. Western Digital and Bain Capital did not respond to Reuters' requests for comment.
Shares of Western Digital plunged 9.3% on Thursday on the news.
ANTITRUST ISSUES
Asked about the cancellation, Japanese Industry and Trade Minister Yasutoshi Nishimura told reporters the government would follow up on the situation and continue to support Kioxia as the company is an important manufacturer of advanced chips.
The companies were pursuing a merger in the face of a global chip glut and weak demand for flash memory chips, which have increased pressure on chipmakers to consolidate.
Since they first started merger talks two years ago, Kioxia and Western Digital's negotiations have often stalled over a number of issues, including valuation discrepancies. There are also concerns about potential antitrust issues, with Chinese regulators posing a big hurdle.
The merger would have given the companies "an opportunity to cut cost and be a more effective competitor in the market", said Mark Miller, analyst at Benchmark Company.
"But it was a very complicated deal to get done. I'm not sure China would approve the deal either."
The companies reported a combined loss of roughly $1.4 billion in their latest quarterly reports.
Last year, Western Digital launched a review of strategic alternatives, after activist Elliott Investment Management disclosed a stake of nearly $1 billion in the company and pushed it to separate those businesses.
Japan's top banks were set to commit 1.9 trillion yen ($12.63 billion) in financing to support the merger, Reuters had reported last week.
SK Hynix invested 395 billion yen in Kioxia in 2018 as a member of a Bain-led consortium that bought the Japanese firm from Toshiba Corp for 2 trillion yen. It holds convertible bonds that can be converted into an equity stake of up to 15% in Kioxia and its approval was one of the preconditions for the merger.
($1 = 150.4200 yen)
(Reporting by Yoshifumi Takemoto, Makiko Yamazaki and David Dolan in Tokyo, Aditya Soni, Juby Babu and Chavi Mehta in Bengaluru; Editing by Shweta Agarwal; Maju Samuel and Muralikumar Anantharaman)
