Toshiba's Seagate Acquisition 'Unlikely,' Going Private 'Possible': Analyst

Despite rumors of Toshiba, Western Digital, Hitachi or Samsung buying Seagate Technology, an analyst believes Seagate is still likely to go private.

What's going to happen to Seagate Technology? No one seems to know for sure, as rumors swirl that instead of going private, the company may be an acquisition target for Toshiba or one of its rivals. However, Wedbush Securities analyst Kaushik Roy said a strategic buyout doesn't make sense.

"It is possible, but the probability is very low," Roy told eWEEK. It's more likely that the rumors are just a way to signal bidders that there are other interested parties, and the "time to make a deal is now," he said. Noting Seagate CEO Steve Luczo's banking background, he said, "It's a game. Steve is not there to keep the job as a CEO. He is not going to sit idle until the deal is done. He wants to make money."

The New York Post reported Nov. 23 that instead of going private, Seagate might be acquired by Toshiba, fresh off its $500 million acquisition of Fujitsu's hard disk drive business in 2009. As one of the smaller players in the HDD market, acquiring Seagate would propel the Japanese electronics manufacturer into the ranks of Western Digital and Hitachi.

The report of a "rival strategic buyer" came shortly on the heels of a Nov. 22 Reuters article that indicated Bain Capital has left the consortium of private equity firms planning to buy Seagate. It appears that the flurry of excitement that accompanied Seagate's October announcement about an offer of a leveraged buyout was a bit premature, as potential partners have been quietly withdrawing from negotiations.

The private equity consortium to take Seagate private was originally headed by Texas Pacific Group Capital and Kohlberg Kravis Roberts. According to Reuters, KKR has reportedly pulled out, as has Silver Lake, another firm that had been interested in the deal.

"A deal could still materialize," as TPG Capital is looking for more partners, according to the Reuters story. At $6.8 billion, it could be the biggest leveraged buyout deal in history if it goes through.

Although Samsung has the money to buy Seagate, sources told the Post that Samsung is more interested in growing its semiconductor business and not "what is viewed as the commodity" disk drive space. It was also possible that Western Digital and Hitachi might consider buying Seagate and become the biggest drive manufacturer, according to the Post.

According to Roy, Toshiba and Samsung are primarily SAS vendors focusing on the SSD (solid-state drive) market. As the largest manufacturer of flash memory used to make SSDs and the largest SSD manufacturer, respectively, he didn't think either company would consider Seagate as a strong addition to their SSD plans. The two companies are also not known for making large U.S. acquisitions, he said.

Even though Seagate sells SSDs, it does not manufacture any of the components required, such as flash memory, controllers or the interface. It partners with other companies, including Samsung, for its SSD components, and is not considered a big SSD player, said Roy.

As for Hitachi, the company wants to take its Hitachi Global Storage Technologies public in the United States. "In this situation, they aren't likely to buy companies," said Roy.

A Western Digital deal was out of the question because of antitrust issues. "Granted, there are three other vendors, but Western Digital and Seagate are the two largest companies in the market," said Roy.

The HDD industry is dominated by three players: Seagate, Western Digital and Hitachi. Seagate holds 30 percent of the overall hard drive market and close to 60 percent of the enterprise storage market, according to ThinkEquity.

According to the New York Post, TPG Capital is "having difficulty keeping its investor group together," and lenders are "nervous about Seagate's earnings projections." The company's earnings for first quarter of fiscal year 2011 missed expectations, with sales of $2.7 billion at the low end of the company's guidance range. Seagate's senior executives refrained to give any guidance for the quarter or next year during the earnings call in October.