Bain Capital’s Quest to Build an Unbeatable Chip Empire in US-Japan Under Threat

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Bain Capital’s ambitions to create a US-Japan chip champion through the merger of Kioxia and Western Digital are at risk due to opposition from a key investor.

According to four sources with direct knowledge of the talks, South Korea’s SK Hynix has refused to approve the deal in the final phase of negotiations.

SK Hynix was part of the consortium, led by Bain, that acquired Toshiba’s semiconductor unit for $18bn in 2018. This deal stands as the largest buyout in Japan by a private equity group.

Although Bain had initially planned to list Kioxia in 2020, the uncertain circumstances caused by the Covid-19 pandemic and deteriorating US-China relations led to the merger discussions with Western Digital.

Combining these two companies would result in one of the world’s largest manufacturers of Nand flash memory chips, aligning with the efforts of the US and Japan to strengthen their chipmaking capabilities against China.

However, concerns raised by two individuals close to the deal indicate that SK Hynix has reservations about whether the merger would effectively compete against industry leader Samsung.

According to two sources familiar with the talks, Kioxia’s main lenders are preparing a loan of ¥2tn ($13bn) to finance the merger. However, the approval of the investors in the consortium is necessary for the deal to proceed.

Meanwhile, other parties involved in the discussions have cautioned that Chinese antitrust regulators may block the agreement if it is reached.

The semiconductor industry has faced significant scrutiny, with SoftBank’s sale of Arm to Nvidia collapsing last year due to concerns raised by regulators in the US, UK, and EU.

Some members of the consortium argue that merging with Western Digital is the only option to ensure Kioxia’s survival in an intensely competitive industry. In 2020, SK Hynix agreed to acquire Intel’s Nand memory business for $9bn, aiming to enhance its production capacity.

If the deal proceeds, Western Digital would own 50.1% of the merged group, with the headquarters located in Japan. The majority of board members, including the president, would come from Kioxia, which would hold 49.9% ownership of the merged entity.

Following the news of SK Hynix’s opposition to the merger, shares in Western Digital dropped on Tuesday. Nikkei reported the development and also mentioned that SK Hynix explored a potential partnership with SoftBank in case the deal falls through.

SK Hynix denied approaching SoftBank and declined further comment. Kioxia declined to comment, while Bain, Western Digital, and SoftBank were not immediately available for comment.

Additional reporting by David Keohane in Tokyo