Seagate Acquisitions Max Out

Maxtor buy opens door to new markets.

Seagate Technology LLC plans to use its recent acquisition of Maxtor Corp. as a catalyst for accelerating its Far East manufacturing capabilities and as insurance against expected PC price fluctuations this year.

However, industry analysts say that Seagate, of Scotts Valley, Calif., will have its hands full completing the technical aspect of the Maxtor merger late this year as it simultaneously starts its transition from longitudinal to perpendicular recording on many of its devices.

Seagates move to acquire Maxtor for $1.9 billion in an all-stock transaction is expected to strengthen the hard disk drive makers ability to provide desktop and enterprise drives, while taking some leverage on the desktop away from PC OEMs and moving it back to Seagate to help solidify pricing, said Steve Baker, an analyst at The NPD Group Inc., in Port Washington, N.Y.

"[The Maxtor acquisition] probably is going to force companies to not be able to decrease prices as fast," Baker said. "I dont think it will be a huge number, but, of course, theres an awful lot of leverage Dell [Inc.] and HP [Hewlett-Packard Co.] have there, and Seagate has lost a lot of that leverage, having gone down from four to three potential desktop suppliers right now."

Jim Porter, president of DiskTrend Inc., a Mountain View, Calif., storage industry research company that tracks the disk drive arena, said Seagate has acquired a company in Maxtor that was coming off a string of "unspectacular years."

Still, Porter said that Seagate CEO Bill Watkins can successfully leverage Maxtors manufacturing operations in Southeast Asia to complement Seagates push into China and other markets—although he does expect consolidation to occur.

"Watkins is an outstanding operations leader in all basics of the industry and [has the ability of] putting the final drives together and agreeing with all the characters what the next steps should be. Im sure hell do a pretty good job of combining the companies. Hes been through industry consolidation before; I think he understands what needs to be done," Porter said.

Seagates purchase of Maxtor, of Milpitas, Calif., comes on the heels of its September acquisition of Mirra Inc., a data management and backup vendor in Sunnyvale, Calif. Watkins said the company is well-versed in acquisitions and chose to bring Maxtor under its brand to increase Seagates scale and operating-efficiency costs.

"Were pretty familiar with the pros and cons of high-tech mergers. Ill be honest: What we dont like about them is when you have to do a lot of integration. A lot of companies get into trouble when they have to rationalize and integrate road maps and cultures. If we thought it was something like that, we probably wouldnt have done it," Watkins said. "Its really a leveraged deal looking at how we take their revenues and replace their products with our products, our manufacturing, processes, etc."

Watkins said Maxtors media manufacturing is one area Seagate will be eager to integrate into its own products. He said Seagate will capitalize on the growth of notebook computers, the expansion of desktops into new markets, and consumers storing more content on a host of personal devices that are backed up and collected at a central home location.

"Whats happening is people are digitizing their content and moving it and holding it in multiple places—the home and car," said Watkins.

Maxtor has been active in building 3.5-inch drives used for living room and television applications. It has not been a significant player in growing mobile areas.

A major test for Seagate will be its approach to completing the physical consolidation of Maxtor in the second half of this year while being faced with the beginning of a large transition to perpendicular recording technology in its hard disk drive offerings. Perpendicular recording drives enable more storage capacity by stacking storage bits vertically on disks.

"The [disk drive] industry is running out of gas in longitudinal disk drives, and [vendors] cant take it much further in improvement. Perpendicular uses fewer heads and disks as you go up in recording density," or aerial density, Porter said.

He said that the transition to perpendicular recording should come next year on 2.5-inch disk drives for PC notebooks.