In a landmark storage industry deal, Western Digital, the world's No. 1-selling hard disk drive manufacturer, revealed March 7 that it is acquiring competitor Hitachi Global Storage Technologies in a cash and stock transaction valued at approximately $4.3 billion.
The breakdown was reported as $3.5 billion in cash and 25 million WD common shares valued at $750 million. The latter was based on the WD closing stock price of $30.01 on March 4, 2011.
Hitachi Global Storage, a division of Hitachi Ltd., is the world's third-largest hard drive maker. The combination of WD (31 percent) and Hitachi GST (about 18 percent) puts substantial market-share distance between WD and No. 2 Seagate, which owns about 30 percent of the market.
Unit shipments of the new WD could achieve close to 50 percent of the total market, assuming no share loss, Gerson Lehrman Group said in a flash report.
Western Digital will retain its name and remain headquartered in Irvine, Calif. John Coyne will continue to serve as chief executive officer of WD, with Tim Leyden as chief operating officer and Wolfgang Nickl as chief financial officer.
Steve Milligan, president and chief executive officer of Hitachi GST, will join WD at closing as president, reporting to Coyne.
Hitachi Ltd. will not be leaving the HDD market. Following the acquisition, it will own 10 pecent of WD and will use those HDDs in its own storage systems business, where it owns about 8.7 percent of the global market.
Hitachi GST makes most of the hard drives for Apple PCs. That relationship is not expected to be impacted by the acquisition.
In June 2010, WD overtook Seagate in unit shipments with a market share of 31 percent versus 29 percent for Seagate, which had dominated that metric for several years. WD has maintained that edge since then. Nonetheless, Seagate's revenue market share had been slightly higher than WD's due to a more diversified portfolio, especially in the enterprise segment.
The acquisition of HGST will change all that for WD.
The acquisition news follows recent industry reports of a boom in NAND flash sales for solid-state devices such as Apple iPhones, iPads, Android-type phones/tablets and others. Other market reports have shown a nosedive in sales of HDD-driven netbooks, laptops and desktop PCs during the last 12 months.
'Massive Transformation' Happening in HDD Business
"The disk drive business is going through a massive transformation," Brian Babineau, vice president of Research and Analyst Services at Enterprise Strategy Group, told eWEEK.
"PC shipments are down, thanks to iPad and tablets (using flash)! Servers are being consolidated-thanks to VMware, Microsoft and Citrix. And enterprise storage system suppliers are evaluating solid-state disk drive and other flash technologies."
Because the drive companies are competing for volume to achieve scale, there was no question that there needed to be consolidation; it was more of a matter of who was going to be the consolidator, Babineau said.
"[Hitachi Global Storage] has innovated reasonably well across drive components and has a well-established presence in the enterprise (servers, storage systems) markets," Babineau said. "Western Digital was making significant progress in attacking those enterprise markets, and now they can do it faster while improving scale."
Consolidation in this sector has happened periodically during the last decade. Hitachi acquired IBM's hard drive business in 2002, and Seagate bought Maxtor in 2005. In a much smaller deal, WD acquired embedded HDD maker SiliconSystems in 2009 for $65 million.
Now It's All About Scale
"A huge amount of this is about scale, economies of scale, scale of R+D, scale of porfolio ... and did I mention scale?" Mark Peters, senior analyst at Enterprise Strategy Group, told eWEEK. "Making money in this high-volume business requires scale in most respects.
"I say 'most' because the loss of a major competitor leaves the potential for less-aggressive pricing. Seagate (joint No. 1 on shipments before this deal) and the other remaining competitiors (such as Toshiba) might also see this as an opportunity to compete more."
When the deal is completed, Hitachi Ltd. will own approximately 10 percent of Western Digital shares outstanding after issuance of the shares, and two representatives of Hitachi will be added to the WD board of directors at closing.
Hitachi maintains a substantial storage systems business, so its part ownership of WD should serve it well there.
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. WD plans to fund the transaction with a combination of existing cash and total debt of approximately $2.5 billion.
WD's stock price jumped more than 11 percent (about $3.40) during trading on March 7 to $33.41 by 2:20 p.m. Eastern time. Hitachi Ltd. was up 6.3 percent to $64.70 about an hour before closing on March 7.