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Western Digital-Hitachi Deal Adds to Pressure on Seagate

{complink 4842|Seagate Technology LLC} executives must confront the harsh reality the company could be further sidelined in the hard disk drive market, following today's announcement of an agreement for {complink 6308|Western Digital Corp.} to purchase {complink 2396|Hitachi Global Storage Technologies (Hitachi GST)} for $4.3 billion.

The investment market's reaction to the news says it all. After the deal was announced, Western Digital's stock price shot up almost 12 percent, and the ADR of {complink 2393|Hitachi Ltd.} rose 5 percent. The increase in Hitachi's ADR price is understandable, considering the company would be receiving $3.5 billion in cash and 25 million shares in Western Digital to close the deal.

For Western Digital, however, the double-digit increase in its stock price is odd for a company that is about to take on about $2.5 billion in new debt to fund the transaction. Typically, following such an announcement, the acquirer's stock price fluctuates wildly, sagging a bit or declining sharply, depending upon market perception of the transaction. The share price falls slightly if the deal is seen as good and easy to complete; it falls significantly if investors consider the deal to be a bad move.

I can understand why investors are so gung-ho about Western Digital's move and are viewing it as a major positive development for the company. The HDD market is under pressure as demand moves away from hard disk drives to flash memory, especially in the tablet market. Consolidation is inevitable, and Western Digital, which is already the No. 1 vendor in the sector, will most likely pull further away from Seagate, its main competitor.

“We believe this step will result in several key benefits — enhanced R&D capabilities, innovation and expansion of a rich product portfolio, comprehensive market coverage and scale that will enhance our cost structure and ability to compete in a dynamic marketplace,” says John Coyne, president and CEO of WD. “The skills and contributions of both workforces were key considerations in assessing this compelling opportunity.”

HGST is the No. 3 supplier in the market, and its acquisition by Western Digital not only creates opportunities for cost-savings but also gives the buyer a chance to increase its penetration into the Japanese market (a boon at a time of depressed demand in other regions and markets). HGST is a major supplier to Japanese OEMs, and many of these important supplier-relationships will be more easily assumed by Western Digital.

Investors also seem to believe regulators in Japan, Europe, and the United States will easily approve the transaction, contrary to the reaction when Western Digital last year offered to buy archrival and No. 2 vendor Seagate. The deal unraveled due to fears of regulatory objections and because Seagate's management did not support the offer. The company also declined an offer by TPG Capital to take it private.

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.

Previous consolidation rounds in the hard disk drive market leave Seagate with minimal options, however. A spate of acquisitions in the industry over the last five years mopped up potential candidates; Seagate itself bought Maxtor about five years ago, but it continued to experience market share erosion and eventually lost the No. 1 crown to Western Digital.

If concluded in the third quarter as expected, the HGST unit purchase would be Western Digital's biggest acquisition. Previously, the company spent $1 billion on Komag in 2007, and in 2009 bought Silicon Systems to gain its solid-state drive (SSD) technology. The Hitachi HDD transaction will add more SSD technology from the Japanese company, especially for the enterprise market.

9 comments on “Western Digital-Hitachi Deal Adds to Pressure on Seagate

  1. AnalyzeThis
    March 7, 2011

    I can also understand the investor enthusiasm… I really like the deal as well! If you put the financial terms aside, this acquisition makes a TON of sense.

    Yes, once you start thinking about and looking at the numbers, the appeal of the deal does start to fade… but again: there's a lot to like.

    Now it's true that the HDD market is under pressure. And it's hard to say what the market will look like, say, 20 years from now. But I really like the moves Western Digital is making and like their chances to survive long-term much more than I like Seagate's odds.

    I'd be willing to bet that whatever is left of Seagate gets swallowed up within the decade by a company, nearly as an afterthought.

  2. Eldredge
    March 7, 2011

    I would tend to agree – it looks like Seagate may be left at a serious disadvantage at the conclusion of this transaction.

  3. Mydesign
    March 8, 2011

      Bolaji you are right, Western Digital announced Monday that it's paying $4.3 billion in cash and stock, to acquire Hitachi Global Storage Technologies. Through this deal, Western Digital is picking off one of the last key players. It's also giving itself a foothold in the market for drives that go into servers and corporate-level storage arrays. That's been a weakness for a company mostly known for selling hard drives that go into consumer PCs.

       This deal can be consider as one of the largest in an industry that's been consolidating for decades and gives the combined companies more than half of the worldwide hard drive market. The competitor Seagate owns only less than a third of this segment in market and the rest is contributing by other key players like Toshiba Corp, Samsung Electronics etc. Before the deal, Western Digital is the No. 1 hard drive maker, just ahead of Seagate in terms of units sold and Hitachi is the tird player.

      The news sent Western Digital's stock up 11.6 percent, or $3.47, to $33.48. and Shares of Hitachi Ltd., Hitachi Global Storage's parent, rose 5.7 percent, or $3.50, to $64.74.

  4. DataCrunch
    March 8, 2011

    Then there were two.  It’s amazing that these companies are still profitable.  Drive space increases exponentially and the pricing decreases exponentially.  Nowadays, you can get a 2 Terabyte (TB) drive for about $100.  That can last you a pretty long time before you have to go out and spend for more drive space.  And by that time, you will be able to probably have triple the drive space at a fraction of cost.

    As for the acquisition, I agree it was a smart move.  Let’s see how Seagate will respond this year.        

  5. bolaji ojo
    March 8, 2011

    Dave, This might be the defining moment in the hard disk drive market. Western Digital saw the writing on the wall and made a smart move that will put it far ahead of Seagate in revenue, total volume shipment and operating costs. Seagate is the dominant leader in the enterprise market, an area where Western Digital has struggled to find a toehold. But the acquisition of Hitachi GST gives Western Digital access to that market.

    In the past, Seagate was taken private to enhance its position and after some cost-reduction returned to the equity market as a publicly traded company. That option is available to the company again but I don't think it will change the fundamental challenges facing it or the dynamics of the market.

  6. elctrnx_lyf
    March 8, 2011

    Considering the huge demands for the SSD technology in the future due to the higher number of tablets, WD has definitely made a good move to get the Hitachi storage solutions. With the help of the Hitachi research experience, WD will be able to deliver the products required for the futre memory needs of the computing industry.

  7. jd111358
    March 9, 2011

    Remember the Disk drive wars of the mid 80's?

    Seagate quality has always been subpar. Western digital was and is always a quality product. Im not that familiar with Hitachi other than their Consumer electronics lines and their Denon lines which are very good.

    Bye-Bye Seagate!

     

    Anybody remember International Memories Inc (IMI)?

    I was part of IMI……Good Times

  8. Hardcore
    March 10, 2011

    I certainly agree about Seagate being a quality product, however recently they cut the guarantee back from five years to three years, usually my Seagate drives last between 7 and 10 years.

    Western Digital, I would not touch with a bage-pole, always found them a sub-standard product, both from an engineering and a firmware point of view, had far too many bad experiences with Western Digital to ever consider them in a server / high usage environment, once they hit that 'magic' temperature death usually follows within a few weeks, and they fail on mass if purchased at the same time.

    Hitachi I've just purchased 10 of their new top of the line 3TB drives (price just a little over $130us each), which seem to be available ahead of Seagate, I just hope that if any of them do fail, that they fail in 'singles' so that the RAID can cope and recover, if not then it is a problem.

    The issue with Hard drives, is the required investments and infrastructure needed to support R&D in the field not to mention we are getting close to the theoretical limit for magnetic storage, and interestingly 'optical' never turned out to be the threat is appeared to be in the 90's (remember the optical R/W cartridge storage?)

    SSD still needs some serious work as regards reliability and in some cases new designs of file systems, I guess that Seagate would head out towards SSD since it would allow a significant reduction in mechanical R&D, but more towards software.

     

    HC

     

    Yep I remember IMI, still have some of their excellent design books, make great retro reading material, so does MMI (monolithic memories incorporated)

     

     

  9. DataCrunch
    April 19, 2011

    This deal will help Seagate paly catch up to larger rival Western Digital which now claims 50% of the HDD market.  With this deal, Seagate will control 40% of this market.  On an interesting note, Samsung is the leader in NAND flash memory chips, which have become very popular with smartphones, tablets, etc.  This deal will give Seagate early access to NAND technology from Samsung and put the company in a much stronger competitive position.

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