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Tim Cook Weighs Apple's Biggest Deal Yet to Protect Chip Supply

Apple is in talks to invest about $3 billion in Toshiba Corp.’s memory chips business as part of a consortium led by Bain Capital, reports indicate.

It’s been a busy week for Apple Inc. (IW 500/2) While Chief Executive Officer Tim Cook showed off the 10th anniversary iPhone in California, his lieutenants worked half a world away on what may become the company’s largest deal ever.

Apple is in talks to invest about $3 billion in Toshiba Corp.’s memory chips business as part of a consortium led by Bain Capital, according to people familiar with the matter. Apple plans to take an equity stake that could total 16% in a group that also includes Dell Inc., Seagate Technology Plc and SK Hynix Inc., they said. That support convinced Toshiba to sign a memorandum of understanding with Bain and work toward a final agreement this month, they said. If the agreement is completed, it may exceed Apple’s largest deal yet, the $3 billion acquisition of Beats Electronics LLC.

Apple is interested in the chip unit because of the strategic importance of flash memory. The compact chips are essential for its iPhones and iPods, storing every photo, video clip and animoji. Only a handful of companies make the highest-end technology and the dominant player is Samsung Electronics Co. The last thing Cook wants is to end up dependent on his archrival in smartphones, so he wants Toshiba’s chips unit to stay healthy.

“A lot of this is opportunism,” says Mark Newman, an analyst with Sanford C. Bernstein in Hong Kong. “If Apple is involved, then they have a little bit more say in the industry structure.”

Toshiba has been in negotiations since January to sell off its chips business and pay for losses in its nuclear business. The sale has been held up because Western Digital Corp., a joint venture partner with Toshiba in the chips business, has argued it has rights in any sale and filed for arbitration in the U.S. Toshiba needs to raise the money by March to avoid seeing its shares delisted from the Tokyo Stock Exchange. Toshiba declined to comment.

Apple is helping swing the deal away from Western Digital, one of the Cupertino, Calif. company’s own suppliers that tried to buy the chips unit with KKR & Co. Apple has actively opposed Western Digital’s bid, in part because it would concentrate power within the chips industry, the people said. Apple spokesman Josh Rosenstock declined to comment.

John Connaughton, Bain’s co-managing partner, confirmed the firm is working with Apple and Dell, without disclosing details of the negotiations.

“There’s a lot of people that want Toshiba Memory to be an independent company,” he said in an interview on Bloomberg Television. “The management is really aligned with us and supports us because we will be that party that retains that independence.”

Nand flash memory chips are among the most expensive components of the iPhone and the market for the chips is concentrated in the hands of just six suppliers, with Samsung holding more than 40%. For the iPhone maker, Toshiba’s 18% falling completely into the hands of another supplier would further narrow its options and make pricing negotiations tougher. Western Digital had a 13% slice of the market last year and SK Hynix accounted for an similar portion, according to researcher IDC.

Led in Japan by managing director Yuji Sugimoto, Bain worked through spring and early summer to assemble a bid with two state-backed funds, Innovation Network Corp. of Japan and Development Bank of Japan. The consortium offered about 2.1 trillion yen (US$19.1 billion) and was selected as the preferred bidder in June. But as Western Digital and Chief Executive Officer Steve Milligan became increasingly vocal in its opposition, INCJ and DBJ decided to pull back.

Japan’s Ministry of Economy, Trade and Industry then encouraged Toshiba to accept the rival offer from KKR and Western Digital, people familiar with the matter said at the time, in an effort to end the litigation and reach a deal quickly. But Yasuo Naruke, head of Toshiba’s chips business, resisted the proposal, the people said.

In the meantime, Sugimoto worked to win Apple’s support. The U.S. company had originally backed an offer from Terry Gou, the Taiwanese billionaire whose Foxconn Technology Group makes iPhones. But by this month, it was clear that Japanese opposition to Foxconn was insurmountable. Apple and Cook signed on with Bain.

The precise composition of the Bain group is still in flux and may change, the people said. There is no guarantee they will be able to reach a final agreement with Toshiba.

The investment would give Apple “better control of a critical supply chain component,” said Nehal Chokshi, the managing director of consumer and enterprise technology at Maxim Group LLC who rates Apple stock a buy.

After Toshiba announced its MOU with Bain, Western Digital said it is “disappointed” and that it would continue to pursue arbitration claims. Toshiba said Thursday it “regrets” that Western Digital is persistently overstating its rights and that the Japanese company is committed to completing the chip sale by March.

“Western Digital was playing a very aggressive legal campaign against their partner, arguably taking advantage of Toshiba’s financial distress,” says Newman, “and one part of this is just Apple stepping in and saying, ‘Look, that’s enough.”’

By Peter Elstrom and Sam Kim

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