Western Digital To Sell 15 Percent Stake To Chinese Company, Expects No Government Pushback

A China-based company has acquired a 15 percent stake in storage component and solution vendor Western Digital, a move that could trigger concerns among government users of IT equipment.

Western Digital, Irvine, Calif., on Wednesday said it and China-based Unisplendour Corp. Ltd., also known as Unis, entered into an agreement under which a subsidiary of Unisplendour will make a $3.775 billion equity investment in Western Digital. That will give Unisplendour an equity stake of about 15 percent of Western Digital.

The agreement also calls for giving Unisplendour the right to nominate one representative to Western Digital's board of directors.

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Western Digital is one of the world's two largest vendors of hard drives, and is also a major supplier of flash storage and SSD technology. The company also has strong small and midsize business storage array and consumer and prosumer storage lines.

Unisplendour is a subsidiary of Tsinghua Unigroup, which was established by China's Tsinghua University. Tsinghua University has close ties to senior Chinese officials including alumni such as Chinese President Xi Jinping, the Wall Street Journal reported.

Unisplendour in May said it wants to purchase a 51 percent stake in Hewlett-Packard's H3C networking business. Western Digital noted that Intel last year invested $1.5 billion in Unisplendour.

Any China ties to Western Digital could raise concerns when bidding on government contracts, said Dominic Daninger, vice president of engineering at Northern Computer Technologies (Nor-Tech), a Burnsville, Minn.-based custom system builder.

Daninger told CRN his company just submitted a storage bid for a prime defense contractor, and one of the stipulations of that bid is that the solution is compliant with the Trade Agreements Act, or TAA.

Solutions under the federal government's GSA schedule must comply with the TAA, which specifies that components be manufactured by companies in certain countries. "Products have to be U.S.-built, or built in a 'trusted' country," Daninger said. "China is not on the list."

Whether a 15 percent stake in Western Digital will trigger TAA concerns remains to be seen, Daninger said.

"I was looking at Lenovo's servers recently," Daninger said. "Lenovo's engineering, assembly, firmware control and so on are North America-based. That's a key selling point for them. I guess it all depends on the international situation. Things are testy between the U.S. and China now."

Western Digital, in an FAQ issued with the news about the investment, said Unisplendour's 15 percent stake in the company is a noncontrolling stake, and so will likely not be subject to a U.S. government Committee on Foreign Investment in the United States (CFIUS) review, although the company will still file with the CFIUS to be safe.

Western Digital in that FAQ also said the deal will not give Unisplendour operational control of the company or its intellectual property.

A Western Digital spokesperson, responding to a request for clarification, wrote to CRN via email: "The integrity of our products and the security of our customers’ data are of utmost importance to us, and we will ensure that the security of our products is in no way compromised by this investment."

Western Digital President and CEO Steve Milligan, in a statement, emphasized the agreement is an opportunity for his company to grow its global storage business.

"The equity investment ... will help facilitate our growth as we look to capitalize on the many opportunities and changes within the global storage industry," Milligan said in the statement. "This investment reflects Unis' strong support for Western Digital's value-creation efforts."

Investors apparently loved the agreement, responding Wednesday by sending Western Digital's share prices up more than 15 percent.

PUBLISHED SEPT. 30, 2015