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WD-Hitachi merger to eclipse Seagate

Posted: 10 Mar 2011 ?? ?Print Version ?Bookmark and Share

Keywords:acquisition? WD-Hitachi merger? hard disk?

Western Digital has expressed its intention to purchase Hitachi Global Storage Technologies. The planned acquisition could turn the company into the world's biggest hard drive manufacturer and put it ahead of current industry leader Seagate Technology.

The merger marks the next major step in a slow consolidation of the disk drive industry, long under intense cost pressure from its major customer PC makers, themselves under heavy pressure to control costs. Drive makers also face an increasing threat from flash memory.

The combined company would have a commanding hard disk market share of about 50 percent, compared to rival Seagate at just under 30 percent. Drive makers increasingly need heft to survive in a computer industry long known for razor-thin margins, now shifting away from HDD-based PCs.

Hard drive shipments in the first quarter of 2011 are anticipated to reach 160.9 million units, down about 4 percent from 167.5 million in the fourth quarter of 2010, according to a recent report from IHS iSuppli.

WD had revenues of about $9.5 billion in the past twelve months, but reported profits of just over 9 percent of revenues in its last quarter. It shipped about 200 million HDDs in the last year with average selling price falling to about $46.

By contrast Seagate had revenues of about $11 billion in its last 12 months, though profits slid to 5 percent of revenues in its last quarter. Like WD, Seagate sold about 200 million drives in the past year, but its average selling price was higher at about $55.

The acquisition "will reverberate throughout the entire HDD supply chain" with upside for many players, according to one analyst.

"The acquisition of Hitachi GST immediately catapults WD into the number two supplier of HDDs for the enterprise market where WD was relatively weak," said John Rydning, research director for hard disks at International Data Corp. "Demand for HDDs in servers is strong and growing faster than the overall HDD market," he said.

"Near term, Seagate, Toshiba and Samsung will likely capture some redistributed market share, so the move is positive for them as well," he added.

WD will acquire Hitachi GST, a wholly-owned subsidiary of Hitachi Ltd, in a cash and stock transaction valued at approximately $4.3 billion. The deal involves a combination of $3.5 billion in cash and 25 million WD common shares valued at $750 million, based on a closing stock price of $30.01 on March 4. WD plans to fund the transaction with a combination of existing cash and total debt of approximately $2.5 billion.

Hitachi Ltd will own approximately 10 percent of WD shares outstanding after issuance of the shares and two representatives of Hitachi will be added to the WD board of directors. The transaction has been approved by the board of directors of each company and is expected to close during the third calendar quarter of 2011, pending regulatory approvals.

WD expects the transaction to be immediately accretive to its earnings per share on a non-GAAP basis, excluding acquisition-related expenses and restructuring charges.

The merged company will retain the Western Digital name and remain headquartered in Irvine, California. John Coyne will remain CEO of WD, Tim Leyden chief operating officer and Wolfgang Nickl chief financial officer. Steve Milligan, president and CEO of Hitachi GST, will join WD as president, reporting to John Coyne.

"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," said Coyne.

"Together we can provide customers worldwide with the industry's most compelling and diverse set of products and services, from innovative personal storage to solid state drives for the enterprise," said Milligan.

- Rick Merritt
??EE Times

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