Western Digital Corp and Japan's Kioxia Holdings have broken off talks to create one of the world's biggest chipmakers, the Nikkei newspaper reported on Thursday.
The companies were also unable to agree on conditions with top Kioxia shareholder Bain Capital, the report added.
South Korea's SK Hynix - a major Kioxia investor and rival to both the US and Japanese companies - said on Thursday it does not back the deal due to its impact on SK Hynix's investment asset value.
Combining their flash memory businesses could mean they would control a third of the global NAND flash market, on par with top player Samsung Electronics, and threaten the position of SK Hynix, the world's No. 3 maker of NAND flash memory.
Western Digital, Kioxia and Bain Capital did not respond to Reuters' requests for comment.
Shares of Western Digital plunged 11.2% on the news.
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.
Kioxia and Western Digital have held merger talks since 2021 but the negotiations have often stalled over a series of issues, including valuation discrepancies.
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) financing to support the merger, Reuters had reported last week.
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