Why Shares of Western Digital Corp. Soared on Wednesday

What: Shares of hard drive manufacturer Western Digital soared on Wednesday after the company announced that China's Unisplendour will be paying $3.775 billion for a 15% stake in the company. At 12:45 p.m. Wednesday, the stock was up about 13% after earlier rising to more than 16% above the previous close.

So what: Unisplendour is paying $92.50 for each newly issued share of Western Digital, or about 33% above Tuesday's closing price. Unisplendour will also gain the right to nominate one representative to Western Digital's board of directors, a right that the company will lose if its stake falls below 10%. A five-year lock-up period on the new shares is also part of the deal.

Western Digital plans to use the proceeds of the investment to strengthen its balance sheet and pursue long-term strategic growth initiatives. CEO Steve Milligan commented: "The equity investment by Unis will help facilitate our growth as we look to capitalize on the many opportunities and changes within the global storage industry. This investment reflects Unis' strong support for Western Digital's value-creation efforts."

Now what: News of the deal sent shares of various related companies higher. Shares of hard drive competitor Seagate jumped about 5% on the news, while SanDisk is up 7% and DRAM/NAND manufacturer Micron rose about 4%. Micron received a buyout offer from a different Chinese company, Tsinghua, earlier this year, and while a full buyout appears unlikely, the Western Digital deal could serve as a template.

Western Digital, with a few billion dollars of new cash at its disposal, could be looking to make acquisitions, and with memory stocks like Micron and SanDisk losing a big chunk of their value so far this year, the time may be right for a game-changing deal. This prospect, along with the possibility of additional investments from Chinese companies in memory stocks, are sending shares across the memory industry higher.

The article Why Shares of Western Digital Corp. Soared on Wednesday originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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