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| Edited By: |Source: Reuters |Updated: Mar 18, 2018, 02:33 AM IST
U.S.based Seagate Technology's $1.4 billion acquisition of Samsung Electronics Co's loss-making hard disk drive (HDD) business pits it head-to-head with Western Digital Corp in an industry that has been dogged by price wars. The sector is battling persistent sales growth declines and faces a longer-term threat from wireless tablet devices such as Apple's iPad that use more power-efficient flash drives, or solid-state drives (SSD).
Both Seagate and Western Digital have been struggling to adapt to a future where fewer consumers have laptops and many view flash drive as the future of the disk drive industry. The bigger hard disk drive makers are also looking to enter the flash drive arena. The latest deal comes just a month after Western Digital said it would buy the hard disk drive unit of Hitachi Ltd -- a known price aggressor -- for $4.3 billion.
Samsung's HDD business will increase Seagate's market share to 40%, while Western Digital and Hitachi combined will have around half the market, Rodman and Renshaw analyst Ashok Kumar said. "Hard disk drive is a commodity business. It's hard to make money if rivals try to undercut each other," said Wedbush Securities analyst Kaushik Roy, noting that, there should be fewer price wars with only three players left standing.
Toshiba Corp, which bought Fujitsu's HDD unit in 2009, will have around a 10% market share. Seagate had sales last year of $11.4 billion, while Western Digital posted 2010 revenue of $9.85 billion. For Samsung, the world's largest technology firm by revenue, exiting the cut-rate HDD industry will allow it to focus on its memory chip business.
After the deal, Samsung will supply NAND-type flash chips to Seagate for its products, while it will source Seagate HDD for computers, laptops and consumer electronics products. Seagate will also get access to Samsung's customer base across China and Southeast Asia. Western Digital is also looking to reap the benefits of Hitachi's partnership with Intel Corp that allows it access to the chipmaker's NAND flash technology.
Seagate and Western Digital were late in the SSD space, but they will gain a lot of market share as they have scale, relationships and the distribution channels, Roy said.
Analysts expect the entry of Seagate and Western Digital to create headwinds for smaller existing flash chip makers such as STEC Inc and Ocz Technology Group Inc. Solid-state or flash market is currently dominated by Intel, Micron, Samsung and STEC.
Samsung will receive 45.2 million Seagate shares worth $687.5 million, or about 9.6% of the company, and the rest will be paid in cash. With the deal, Samsung will become Seagate's second-largest shareholder. Seagate expects the deal to meaningfully add to its earnings per share and cash flow in the first year, and said it plans no material restructuring costs.
Morgan Stanley was financial adviser to Seagate, while Allen & Co was financial adviser to Samsung and Paul, Hastings, Janofsky & Walker was its legal adviser. Separately, Seagate posted third-quarter profit below market expectations on lower hard-drive shipments, and forecast a fourth-quarter profit below estimates.
Worldwide computers fell 1.1% in the first quarter, said research house Gartner -- the first drop in two years. The sale should give South Korean giant Samsung more firepower for acquisitions and expansion into new business areas such as healthcare and green energy.
Samsung has become flexible in mergers and acquisitions and it could be more aggressive in acquisitions, mentioned Park Young-joo, analyst at Woori Investment & Securities. Seagate shares fell 3% to $17.33 in early trading on Tuesday on Nasdaq.
