WD to Buy Hoya Glass Disk Sputtering Operations

Western Digital Corporation has agreed to purchase the magnetic media sputtering operations of Hoya Corporation and Hoya Magnetics Singapore Pte. Ltd for 22 billion yen (approximately $235 million) in an all-cash transaction.

The agreement includes a multi-year commitment for glass substrate supply related to these operations from Hoya, solidifying WD’s access to a key component for its 2.5-inch hard drive business and further enhancing the ongoing partnership between the companies. The acquisition will augment WD’s existing magnetic media operations, strengthening its ability to meet anticipated growth in demand for hard drives in the years ahead.

WD is acquiring the facilities, equipment, intellectual property and working capital of Hoya’s media sputtering operations, based in Tuas, Singapore, where it expects to employ the entire current workforce. Certain related equipment at Hoya’s Nagasaka, Japan, research and development facilities is included. The acquisition is expected to close in the current calendar quarter.

John Coyne, president and chief executive officer of WD, stated: "This investment will enhance WD’s ability to support our customers’ growth. In addition to these assets, WD will also gain highly skilled and knowledgeable employees, valuable intellectual property and access to Singapore’s deep academic and technology resources. We expect a seamless transition with the integration of this well-run operation into WD, enabling immediate support of anticipated hard drive demand growth in 2010 and beyond."

A set of questions and answers
related to this announcement follows.

Strategic Questions

Q: Why is this acquisition important to Western Digital? What motivated you to do this?
We believe the acquisition will improve WD’s ability to support our customers’ growth. Hoya’s finished media business is a strong fit with WD from a geographic supply chain perspective due to the location of the manufacturing facilities in Singapore. This acquisition will enable us to meet our desired internal/external finished media ratio faster.
Other benefits include:

• provides a further cost advantage;
• mitigates the risk of geographic concentration of our facilities;
• provides an existing pool of talented employees;
• provides us with a more secure supply line of 2.5-inch glass substrates; and
• intellectual property.

Q: What is your own assessment of Hoya’s production capability? Can you get further improved utilization out of the base assets?
The Hoya media facility is productive and well run, however, we believe that WD can bring additional synergies and improvements through scale and the leverage of single-customer focus, as we have done with both our head and prior media acquisitions.

Q: Will you use the facility for glass sputtering only?
We intend to continue operating the facility as is, though the long-term plan is to have the flexibility to respond to any media sputtering demands.  

Q:  How does the product made here compare to what you are currently making in other locations (relative to areal density, quality, etc.)?
Hoya’s products are comparable with the competitive set. Their products are qualified at WD and other hard disk customers.

Q:  How will the Hoya sputtering operation be integrated into WD?
The acquired operation will be part of a wholly owned Singapore subsidiary of WD, operating as a part of WD’s media operations.

Q: Will WD break apart the Hoya finished media operation and move assets and positions to Malaysia?
WD intends to maintain the media sputtering operation in Singapore.

Q:  How does this acquisition change WD’s competitive profile versus the other large vertically integrated players, Seagate and HGST?
We expect it to be accretive to our earnings.

Transaction/Background Questions

Q: What are the terms of the transaction?
The transaction is structured as an asset acquisition consisting mainly of fixed assets and inventory. From a liabilities perspective, we are assuming mainly the facilities leases, current trade payables related to the existing assets and future employee expenses related to the hired workforce. From an employee liability perspective, Hoya will settle all existing employee obligations as of the close date. We will assume employee obligations earned or created after the close date for all employees that are hired by WD.

Q: When will the transaction close?
The transaction will close as soon as we receive certain customary governmental approvals and satisfy certain other customary closing conditions, which we expect this calendar quarter.

Q: Are any anti-trust filings required?
The transaction is beneficial to our customers and is not subject to anti-trust filings or approvals.

Q: Is there a break-up fee?
No.

Q: How are you going to finance the transaction? How much cash will you use? Do you intend to refinance/issue a convertible/other?
The acquisition will be funded with approximately $235 million in cash. We intend to finance the transaction from the existing internally generated cash of our foreign subsidiaries.

Q: When will the operation be fully integrated into WD?
The business is producing finished media at high volumes today for multiple customers; we expect to transition exclusively to WD requirements over a four month period.

Q: How long has Hoya been in the media business?
Hoya’s Singapore operation was established in 1995, as an indirect wholly owned subsidiary of Hoya Japan.

General

Q: Will you be able to make new generation products with the equipment being purchased?
Yes, the equipment being purchased is similar to what is deployed in WD’s facilities today and is extendable to future technology.

Q:  How does this fit into your technology roadmap?
The technology and assets being purchased are a good fit with WD’s product roadmap.

Q. What effect will this have to the media/substrate demand/supply dynamic for WD and for the HDD industry?
This capacity will substitute for planned WD internal capacity additions.

Q: When do you expect to reach full capacity utilization? What will you do with excess disks in the meantime?
We do not expect any excess disks.  We expect all output from the facility to be utilized. We have agreed to supply Hoya customers for up to four months while their customers arrange alternative supply. The balance of output will be directed to WD.

Q. Where will the substrate come from? Is there enough substrate supply to allow full capacity utilization especially in the near term?
The asset purchase agreement includes a provision for Hoya to supply incremental glass substrates to WD to meet the current capacity of this media facility.  WD will continue to source its overall substrates requirements from multiple suppliers, including a portion through a separate arrangement with Hoya.

Q: What is the age and condition of the PP&E?  How does it make sense to buy used instead of new?
The equipment has been continually upgraded and well maintained to perform at the same level as new equipment and is consistent with WD’s forward technology roadmap requirements.

Q: Are you acquiring any of Hoya’s substrate business?
We are not acquiring any of Hoya’s substrate assets.

Q. Has Hoya any commitments to service other customers?
We will honor all legally binding supply commitments with other parties if such parties choose to do so.

Q: What is your internal/external model for media supply?
Our stated goal for both heads and media is approximately 80% internal capability.

Q: Do you intend to use Hoya’s facilities for your internal glass media needs?
Yes, and for all media solutions over time.

Q: What role will Hoya’s Singapore management play in the combined business?
A large and significant role. We are acquiring an efficient, well-run business with good capability and technology. We respect the Hoya management team and look forward to the combination.

Q: Are you intending to keep Hoya employees?
Yes. We believe that the unique skill-set of Hoya’s highly qualified employee base is a critical component of the value Hoya’s assets will deliver to Western Digital.

Q: What do you anticipate WD customer reaction to be with regard to the acquisition?
We believe our customers will view the transaction as very positive as it enhances availability and security of supply.

Q: What do you anticipate WD supplier reaction to be with regard to the acquisition? How will your other media suppliers react?
We have very strong relationships with our other suppliers. We will continue to source a large amount of media from external sources (~20% of our needs). Access to external volume and technology will continue to be a key to our future success.

Q. How does this affect your future growth plans? Do you intend to grow your presence in Singapore? Will you slow down growth in Malaysia or Thailand?
We anticipate HDD demand growth will drive continued investments in all our strategic manufacturing locations including Malaysia, Thailand and now Singapore.

Q: What are the financial benefits of the transaction?
The main benefit is to secure supply. Cost benefits will be moderate. There are a number of variables that have to be taken into account. In the near-term, it will not have a material effect on our financials.

Q:  What will this transaction do to your costs?
Media production is a capital and technology intensive, rather than labor intensive, activity. We expect costs to be competitive with our other media manufacturing sites, as we progress towards full capacity utilization. Further, we expect our overall media cost to improve from cross-pollination of efficiencies among sites.

Q: When do you expect to reach full capacity utilization?
We expect full utilization to occur by the second quarter post-closing.

Q: How much incremental capex will you need post-acquisition?
Initial start up and WD customization spending will be in the order of $30 million over the next year. Subsequent capex will be consistent with our current spending relative to internal run rate.

Q: What external sales have you estimated for the media business?
The asset purchase agreement includes specific volume required by Hoya to support its customers’ needs over the initial four months after transfer.

Q: Will you have any synergy savings from R&D and opex?
We will get the leverage of increased production from our existing R&D and opex spending. The impact on our opex spending will be minimal; we will not be changing our existing opex model of 9 to 10% of revenue.

Q: How does this impact your balance sheet?
Most of the value will be in PP&E and inventory, partly offset with some A/P. Some IP and goodwill. Inventory turns will be impacted slightly, but it will not be enough to affect our current model of 12 to 16 turns.

Q: Can you expand a bit on the impact on your model?
We will evaluate it more as we progress but we anticipate that it will enhance our ability to expand our gross margin range from our current 18%-23%. A more vertically integrated business will require a bit more inventory and we will act to optimize the inventory levels as we always do. We need to do a bit more work to finalize the numbers, but we believe that we will still be very competitive in the industry.