Analysis of WD/Hitachi Huge Deal

At $4.3 billion, the acquisition of Hitachi GST is the second highest-paid deal in the history of the storage industry if you don’t include the first three concerned partly with storage (see table below). The fist one was the acquisition of Veritas by Symantec for $11 billion in 2005. And of course, it’s the highest one in HDD market, more than twice than any other one, by far in front of the Hitachi/IBM HDD deal at $2.050 billion in 2002 (see table below).

There was already some signs that WD wanted to expand externally and buy a competitor. The company tried to get Fujitsu HDD and then even leader Seagate few months ago for much more than that, but didn’t succeed. Hitachi GST was currently looking at an IPO, a good reason for WD to try an offer. And this one is going to succeed.

Finally WD was lucky not to obtain them, because HGST is a better deal than Fujitsu and a cheaper one than Seagate.

The addition of WD with HGST is changing completely the face of the HDD market. Now we have two Asian computer manufacturers, Samsung from Korea and Toshiba from Japan, against two U.S. ones, much more powerful independent Seagate and WD focusing on HDDs only. The consolidation in this sector continues. There was hundred of manufacturers in the past.

Now the competition is restrained to only four names, and the question is: "Will they continue to compete properly, enough to see the prices of HDDs continuing to decrease?" We think so for two reasons: Seagate and WD are public companies, they cannot try to negotiate to limit the competition as the SEC will immediately react vigorously. Secondly, if they want to slow the success of SSDs, they have to put pressure on the prices, today their only advantage in front of flash disks. We are not sure of the future of Samsung and Toshiba in disk drives as they are deeply involved in flash memories. We don’t remember who says that – maybe us – in the past:" As long as there will be two HDD manufacturers, the price war will continue."
 
Looking more deeply at the merging of WD and HGST, the new entity will be – and by far – the number one in term of revenues and units shipping, a position that Seagate was holding for PC and servers since its inception in 1979. WD was just recently selling more drives than Seagate but for fewer total revenues.

Looking at figures published by WD for 4Q10 and apparently not questionable, the addition of WD and HGST represents 49% of all HDD shipped, in front of Seagate (29%) followed by Samsung and Toshiba with 11% for both of them.

For 2.5-inch mobile-class devices the ranking is: 1/ WD/HGST 49%, 2/ Toshiba 20%, 3/ Seagate 18%, and 4/ Samsung 13%.

Now for desktop units, it’s 52% for WD/HGST, followed by 38% for Seagate and 10% for Samsung (Toshiba do not manufactured them).

And finally for enterprise drive market, that’s the most remarkable operation for WD. Seagate is largely dominating with 58% where WD is insignificant (1%) but now being at 29% thanks to HGST. Toshiba represents 13%. HDS was a big customer of HGST high-end HDDs but, in the agreement with WD, it is supposed to continue to buy drives from the merger company for its disk arrays for a period of two years after the closing of the acquisition.

Globally WD sold 52 million HDDs in 4Q10, HGST 30 million. During the same time, Seagate delivered 49 million HDDs.

Now in term of revenues for the quarter, they represented together a little more than $4 billion with 62% for WD and 38% for HGST, 48% more than Seagate at $2.7 billion.

Following this big investment, WD will have to find enough money to invest in R&D to develop next generation of HDD technology behind GMR not far from the limit in areal density.

Behind this enormous deal, it’s a big victory of WD’s CEO Coyne, a native of Dublin, Ireland and a mechanical engineer who took time to transform radically a company that he joined in 1983 and never quits, against CEO Steve Luczo who starts at Seagate in 1993 being before that essentially a financial guy to whom we will never forgive the way his company fired now defunct legendary Al Shugart in 1998.

Steve Milligan, who was CFO of WD, will join the acquirer as president. He did an excellent job since 2009 as CEO of Hitachi GST to help his company to come back to profitability.

       
Biggest Deals in HDD Industry
                 
(in $ millions)

 (Source: StorageNewsletter.com)

       
More Than $2 Billion Deals
            in Storage Industry
                 
(in $ millions)

 
(Source: StorageNewsletter.com)