Seagate Apparently Cannibalizes Maxtor in Acquisition

Obervers say the acquisition is more the cannibalization of a successful IT hardware company than the integration of one company into another.

PC disk-drive maker Seagate Technology wrapped up its months-long acquisition of Fremont, Calif.-based Maxtor on May 22, marking another step in the continued consolidation within the disk drive business.

Seagate said it plans to lay off about half of Maxtors 12,000 employees during the rest of calendar 2006.

Most of those cuts will occur in the United States; of the 2,400 people employed by Maxtor in Milpitas, Calif., all but about 100 will have to find new jobs, Seagate said.

No Seagate employees will be let go, the company said. Seagate will end up with about 55,000 employees, with 2,500 based in the San Francisco Bay area.

Seagate, the worlds No. 1-ranking PC disk-drive manufacturer, will take over Maxtors large new disk-drive factory in China, which employs 6,000 workers. Maxtor was the No. 4-ranked disk-drive maker in sales.

Seagate, which has its corporate headquarters in Scotts Valley, Calif., but is based for tax reasons in the Cayman Islands, announced in December that it would acquire Maxtor in a stock deal valued at roughly $1.9 billion. Shareholders of both companies approved the deal.

The acquisition of Maxtor appeared to some observers to be more a cannibalization of a successful IT hardware company than the integration of one company into another.

"Very much so. In fact, Seagates CEO said as much," said Charles King of Pund-IT in Hayward, Calif.

"From a practical standpoint, Seagate wanted Maxtors consumer/SMB backup products, its drive R&D facility in Colorado, and its facilities in Asia. This translates into buying opportunities in areas where they werent competitive, underwriting potential future products, and bolstering low-cost production.

"They werent looking to enhance their corporate vision. At one level, its a very smart business strategy."

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At another level, King said, its an ugly example of whats been happening to U.S. manufacturing for years.

"What weve been seeing for the past half-decade or so is the commoditization of the HD market," King told eWEEK.

"HD price-performance evolution has long outpaced processors (i.e. Moores Law) to the point where HDs are faceless devices for the vast majority of consumers.

"IBMs sale of its HD division to Hitachi a few years ago marked the beginning of this trend. I expect consolidation to continue over time, resulting in fewer and fewer manufacturers.

"Its not so much a matter of falling prices as it is falling margins. The survivors will be the vendors who can successfully translate razor-thin margins into profitable business."

Prices having been falling for almost a decade. Drives with 250GB of storage can be bought for $150 in some stores; drives with 1GB to 2GB of storage sold for $400 or more in the late 90s.

Prior to acquiring Maxtor, Seagate had a 29 percent market share, with Western Digital (18 percent) second and Hitachi (14 percent) third. Maxtor had been fourth with a 12 percent share.

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Chris Preimesberger

Chris J. Preimesberger

Chris J. Preimesberger is Editor-in-Chief of eWEEK and responsible for all the publication's coverage. In his 13 years and more than 4,000 articles at eWEEK, he has distinguished himself in reporting...