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Seagate Roars Back With Samsung HDD Purchase

{complink 4842|Seagate Technology LLC} had to respond, smartly and forcefully, to Western Digital's $4.3 billion purchase of Hitachi Global Storage Technologies in March. (See Western Digital-Hitachi Deal Adds to Pressure on Seagate.)

It did, today, with the announcement of a deal to acquire the hard disk drive business of {complink 4751|Samsung Electronics Co. Ltd.} for approximately $1.38 billion. The amount involved in the Seagate-Samsung deal may be much smaller than the Western Digital deal, but its implications for Seagate by far dwarf the size of the transaction itself.

By moving quickly to wrap up a deal with Samsung, Scotts Valley, Ariz.-based Seagate sends a clear message it won't be sidelined in the hard disk drive market. The transaction puts Seagate back in the driver's seat of its own future and gives customers, investors, and suppliers a good reason to continue partnering with the company.

The negative image that hung over Seagate following the announcement of the Western Digital-Hitachi deal was worrying for a company that used to be the dominant player in its market. The transaction created a behemoth in the market and left Seagate and other HDD rivals panting. The combination opened up new opportunities for Western Digital at a time the technology used for storage in high-tech equipment was rapidly shifting from the core hard disk drive business of the two rivals. Seagate, it seemed at the time, faced a future marked by tepid growth.

Not anymore. The structure of the transaction opens up opportunities for Seagate to sharply increase revenues by selling hard disk drives to captive units within Samsung, which would become its business partner — Samsung agreed to accept both cash and an approximately 10 percent stake in Seagate to clinch the deal.

I blogged last month:

    While the focus is currently on the details of the Western Digital-HGST transaction, investors will also seize this opportunity to examine Seagate's future. Seagate's stock price surged more than 8 percent in intra-day trading on Monday, propelled higher by speculations that the company would have to initiate a deal to boost value and regain market share.

My view then was that Seagate's future would remain dim if the company failed to arrange a major acquisition that would benefit it both in technological and sales terms. The Samsung deal delivers these two perfectly. Integration is always a concern, of course, but with so much on the line and the ability to tap both companies for expertise, I believe they should pull it off smoothly.

I expect more M&A activity in the semiconductor market. Chipmakers are flush with cash, but the return on their short-term and even long-term investments are paltry. I cannot think of a better way to use cash at this moment than to secure additional market share, ease a competitor out, and gain sales leverage through an acquisition.

9 comments on “Seagate Roars Back With Samsung HDD Purchase

  1. Eldredge
    April 19, 2011

    This anouncement certainly indicates that Seagate is going to compete for their place in the market. That will be good for both investors and customers.

  2. SunitaT
    April 20, 2011

    Bolaji,

       This deal will indeed open up opportunities for Seagate to sharply increase revenues because Samsung itself needs HDD's for its PCs, notebooks and consumer electronics. But any reason why  Samsung sold its business to Seagate ? How will it benefit Samsung ?

  3. Jay_Bond
    April 20, 2011

    This is just another sign of the times to come. Seagate made a smart move that is going to allow their company to stay competitive and grow throughout the market. I think that 2011 is going to be a big year for mergers and acquisitions. That being said, 2011 might also be a big year for smaller companies to get pushed out of the market while the much larger companies use their abundance of cash to expand.

  4. elctrnx_lyf
    April 20, 2011

    The acquisition came at the beast time for seagate. With this acqusition they can be very well compete with the WD in future.

  5. AnalyzeThis
    April 20, 2011

    I really don't think this is that great of a deal, plus Samsung gets 10% of Seagate? Hrm.

    This seems like a “me too” kind of thing, as if Seagate saw the WD/Hitachi deal and looked around the room, scrambling for somebody, anybody to buy.

    Hitachi's storage unit is a bigger deal than Samsung, I don't even think most people were even aware Samsung had such a division.

    Anyhow, I don't think this is a BAD deal… but it's not exactly a great move either. I don't think this will really help or hurt Seagate much either way, long-term.

  6. bolaji ojo
    April 20, 2011

    I understand your point but a “me too” reaction is better than ignoring the realities of change swirling around you. Plus, the deal is a lot more than just about the exchange of cash and stock for the two parties. Samsung gets out of the hard disk drive market — it wasn't a major player in it anymore and once it gets out won't have to devote as much engineering and capital expenditure resources to the sector. Someone else will be doing this on its behalf.

    For Seagate, the deal represents a chance to avoid having a rival pull too far away. Just ask Advanced Micro Devices, which is so far from Intel it cannot be considered a dangerous competitor. Let's not forget that Seagate gets a 10 percent owner on its board of directors. That ownership comes with benefits as well as obligations and when it comes down to product roadmap and process technology, Samsung is on the hook if Seagate needs additional capex.

  7. Anna Young
    April 21, 2011

    You are absolutely right. Seagate needed to act quickly otherwise it will be sidelined. I think the acquisition is a wise move. May not be the best of deals, however this will open up new opportunity for Seagate and provide what it needs to compete again.

  8. itguyphil
    April 21, 2011

    This just has the feel now like it's going to be an arms race via acquisition. It makes you wonder if it will work short-term first & foremost. Then you wonder if it will be a good long-term strategy?

  9. t.alex
    April 22, 2011

    What's more, for notebook and mobile markets, hard disk seems not an appealing choice because solid state drives is getting popular. Hard disk is on the fringe of being phased out in these markets soon. Perhaps server market still require for sometime.

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