WD Acquires SiliconSystems for $65 Million

Western Digital Corp. has completed a $65 million cash acquisition of SiliconSystems, Inc., Aliso Viejo, Calif., a supplier of solid-state drives for the embedded systems market.

Since its inception in 2002, SiliconSystems has sold millions of SiliconDrive products to meet the high performance, high reliability and multi-year product lifecycle demands of the network-communications, industrial, embedded-computing, medical, military and aerospace markets. These markets accounted for approximately one third of worldwide solid-state drive revenues in 2008. SiliconSystems’ product portfolio includes solid-state drives with SATA, EIDE, PC Card, USB and CF interfaces in 2.5-inch, 1.8-inch, CF and other form factors. SiliconSystems has developed extensive intellectual property to address the stringent embedded systems market requirements to ensure data integrity, eliminate unscheduled downtime, protect application data and software and provide for data security and protection through its patented and patent-pending PowerArmor, SiSMART, SolidStor and SiSecure technologies.

WD’s storage industry leadership, worldwide infrastructure, and technical and financial resources will enable further growth in SiliconSystems’ existing markets and customer relationships. SiliconSystems’ intellectual property and technical expertise will provide additional building blocks for future products to address emerging opportunities in WD’s existing markets.

"We are delighted to have the SiliconSystems team join WD," said John Coyne, president and CEO of WD. "The combination will be modestly accretive to revenue and margins as a result of SiliconSystems’ existing position as a trusted supplier to the well-established $400 million market for embedded solid-state drives. SiliconSystems’ intellectual property and technical expertise will significantly accelerate WD’s solid-state drive development programs for the netbook, client and enterprise markets, providing greater choice for our customers to satisfy all their storage requirements."

Integration into WD begins immediately, with SiliconSystems now becoming known as the WD Solid-State Storage business unit, complementing WD’s existing Branded Products, Client Storage, Consumer Storage and Enterprise Storage business units.

"WD’s strong balance sheet, sales reach, and operations and logistics capabilities will allow us to greatly accelerate our penetration of our existing markets, while combining our engineering expertise with WD will enable us to develop new solid-state drives to broaden our overall product portfolio and address the emerging applications for solid-state storage in WD’s existing customer base," said Michael Hajeck, a founder and CEO of SiliconSystems, now senior vice president and general manager of WD’s Solid-State Storage business unit. "We are extremely excited to be joining WD and enabling an even stronger future for our talented team."

Here is a set of questions and answers
by WD related to this announcement:

1. Who are SiliconSystems? http://www.siliconsystems.com/about/about.aspx
2. What are SiliconSystems’ products? http://www.siliconsystems.com/products/products.aspx
3. What are SiliconSystems’ markets? http://www.siliconsystems.com/applications/applications.aspx
4. What are SiliconSystems’ technologies? http://www.siliconsystems.com/technology/technology.aspx
5. How big is the solid-state drive market? In 2008 it is estimated
   at $1.1 billion. The largest sub-segment was embedded systems at $400
   million. (The majority of SiliconSystems’ current business is in the
   embedded systems segment.
6. Who are SiliconSystems’ customers? SiliconSystems serves a broad
   customer base, including many Fortune 500 companies in the
   network-communications, industrial equipment, medical, aerospace and
   military markets. The top-ten customers represent approximately 40% of
   the business. The majority of these customers are new WD customers.
7. Who are their competitors and suppliers? Main competitors are STEC, Adtron (Smart Modular), Hagiwara Sys-Com. We do not disclose supplier names; this is company policy.
8. How will this impact WD’s OPEX? Impact to our operating expense model will be minimal.
9. What is SiliconSystems’ historical business model? Gross margins are higher than any of WD’s existing businesses. OPEX is higher, due to higher support requirements.
10. Is SiliconSystems profitable? Yes, founded in 2002, SiliconSystems has been profitable since 2005.
11. What portions of SiliconSystems is WD acquiring? The entire company.
12. When does WD expect the acquisition to be accretive? Immediately.
13. Will SiliconSystems be absorbed into WD or operate separately?
    SiliconSystems will operate as WD’s Solid-State Storage business unit,
    similar to our existing business units of Branded Products, Client
    Storage, Consumer Storage, and Enterprise Storage.
14. When will WD market an SSD for computing applications? Today’s
    acquisition strengthens and accelerates our ability to get to market
    with additional SSD products. We announce new products when they begin
    shipping. WD implements new products and technologies that are
    meaningful to customers and at a time when the company can maximize the
    critical balance of cost, reliability, quality and availability, while
    meeting our customers’ needs.
15. Does this acquisition displace WD’s traditional enterprise development?
    Both magnetic and solid-state technologies are complementary in
    enterprise applications, especially in emerging tiered-storage
    architectures.
16. How many employees does SiliconSystems have? Does WD plan to keep all of them? WD plans to retain substantially all of the approximately 100 employees.
17. Will the incremental business be cash flow positive immediately? Yes.
18. What is the extent of the SiliconSystems asset base? Undisclosed.
19. Will this increase your projected CAPEX for the balance of FY 2009 and onwards into 2010? No, we do not expect a material change in our CAPEX outlook.
20. Will this have an impact on your tax rate? Impact to our effective tax rate will be minimal.
21. Will you have accounting entries and charges in the current quarter to reflect the purchase? Our purchase price allocation for accounting purposes is currently in process. We expect that some portion of the purchase price will be allocated to in-process research and development. In accordance with FAS 141, this amount will be recorded as a one-time charge during our fiscal third quarter, which ended on March 27, 2009.