WD/HGST and Seagate/Samsung Deals Face EU Antitrust Scrutiny
All HDD customers worried about this huge consolidation
This is a Press Release edited by StorageNewsletter.com on May 31, 2011 at 3:04 pmThe European Commission has opened two separate in-depth investigations under the EU Merger Regulation into two proposed US/Asian concentrations in the hard disk drive sector.
The first transaction concerns the planned acquisition of the HDD business of Korean firm Samsung by Seagate Technology of the US.
The second transaction concerns the planned acquisition of the storage business of Japan’s Hitachi by Western Digital Corporation of the US.
HDDs systems are used in a variety of professional and consumer electronic goods to store and access digital data, including computers, digital video recorders and camcorders. Commission Vice President in charge of competition policy Joaquín Almunia said: "Hard drives are the backbone of the digital economy. The sector has already experienced significant consolidation and the proposed acquisitions will further reduce competition. The Commission will carefully examine if effective competition is preserved and innovation encouraged."
The Commission’s initial market investigation indicated that both transactions raise potential competition concerns. There are currently five HDD manufacturers worldwide: Seagate, Western Digital, Hitachi (recently renamed Viviti Technologies) Toshiba and Samsung.
A merger between Seagate/Samsung, the first deal to be notified on 19 April, would consolidate Seagate’s leading position in the overall market for HDDs, particularly in the manufacture of 3.5" desktop HDDs where it would only face two competitors (Western Digital and Hitachi). The Western Digital/Hitachi transaction, which was examined in the light of the previous deal, would create the world’s market leader in the overall HDD market. For 3.5" desktop HDDs in particular, the only competitor would be Seagate/Samsung. For 2.5" mobile HDDs, it would only face Seagate/Samsung and Toshiba.
The opening of in-depth inquiries does not prejudge the final result of the investigations. The Commission now has 90 working days, i.e. until 10 October, to reach final decisions on whether the transactions would significantly impede effective competition to an extent that would be detrimental to customers and consumers in the European Economic Area (EEA).
Seagate/ Samsung
The assessment of the Seagate/Samsung transaction is made without regard to the Western Digital/Hitachi transaction, which was notified a day after the Seagate/Samsung transaction, on 20 April.
The investigation showed that the merged entity would have a significant market share in the overall market for HDDs, particularly in 3.5" desktop HDDs where it would only face two competitors (Western Digital and Hitachi). This could impact negatively on customers’ ability to obtain competitive prices for the product. The merger could also reduce the manufacturers’ incentives to innovate in the market. Respondents to the market investigation have raised concerns with respect to a risk of coordination between HDD manufacturers.
In addition, the proposed transaction would lead to the integration of Samsung, which currently sources heads for HDDs from the only independent heads supplier, TDK of Japan, into a company that is vertically-integrated into head manufacturing. This might lead to a significant reduction in the demand for heads – a crucial component of HDDs. This could in turn result in uncompetitive prices for heads and a weakening of TDK’s ability to keep innovating. This would also negatively affect Toshiba’s competitiveness in the HDD market, as Toshiba depends on TDK heads.
Lastly, the Commission’s market investigation revealed that Samsung is an important supplier of HDDs to non-integrated external storage devices (ESD) manufacturers because of its competitive prices and innovative product offers. The initial investigation suggested the combined entity might have the ability and incentive to strengthen the market presence of its own branded ESDs by increasing HDD prices or restricting supply for non-integrated ESD providers. This could negatively affect competition and innovation in the ESD market.
Western Digital/Hitachi
The assessment of the Western Digital/Hitachi transaction is made taking into account the Seagate/Samsung transaction, which was notified first.
The Western Digital/Hitachi transaction would create the world’s market leader in the HDD market. For 3.5" desktop HDDs, the only remaining competitor would the combined Seagate/Samsung entity. For 2.5" mobile HDDs, used in notebooks and other portable electronic devices, it would only face Seagate/Samsung and Toshiba. This could also have a negative impact on customers’ capability to obtain better prices and on suppliers’ incentives to keep competing trough innovative products. Concerns were also raised with respect to an increased risk of coordination between HDD manufacturers.
The market investigation also revealed concerns that the combined entity would source fewer heads from the merchant market. In combination with the Seagate/Samsung transaction, this may impact TDK’s ability to invest in the development of more innovative heads and Toshiba’s ability to compete in the HDD market, given its dependence on TDK heads. This could ultimately allow the merged entity to raise HDD prices.
Lastly, the market investigation revealed concerns that the proposed transaction would reduce the available sources of HDDs to the detriment of ESD manufacturers so as to strengthen the combined entity’s leading role in the ESD market. This could negatively affect competition and innovation in the ESD market.
The companies and products
Seagate is active worldwide in the manufacture and sale of HDDs, Solid State Drives (SSDs), branded External Storage Devices (ESDs) and media players. Its operations are vertically integrated upstream in the manufacturing of key components, such as read/write heads and media. The Samsung HDD business being acquired is active in the manufacture and sale of HDDs and branded ESDs. Samsung’s HDD Business is not vertically integrated upstream in the manufacturing of components, but downstream in the manufacturing of computers and consumer electronics. Although Samsung is also active in SSDs, this business will not be transferred to Seagate.
Western Digital and Viviti Technologies Ltd (formerly known as Hitachi Global Storage Technologies Holdings Ltd., a wholly-owned subsidiary of Hitachi Ltd) are both active worldwide in the manufacturing and sale of HDDs, SSDs and branded ESDs. Their operations are vertically-integrated upstream in the manufacturing of key components, such as read/write heads and media.
A HDD is a device which uses one or more rotating magnetic disks to store and allow access to digital data. HDDs are employed in a variety of applications such as desktop and laptop computers and a range of consumer electronics applications such as digital video recorders or camcorders. HDDs are customarily categorized by reference to their end use, in particular:
- Enterprise or Server HDDs (used in servers and enterprise storage systems),
- Desktop HDDs (used for example in PCs and home electronics devices),
- Mobile HDDs (used in notebooks and other portable electronic devices) and
- Consumer Electronics (CE).
SSDs are also data storage devices but using a different technology (flash memory). They have improved technical characteristics such as faster access and higher reliability. However, they still come at much higher prices.
ESDs allow consumers to supplement the storage space of their computers, home and small office networks or CE devices. Contrary to HDDs which are mainly sold to original equipment manufacturers (OEMs) and distributors as components, ESDs are finished products directly sold to consumers.
There are currently five HDD manufacturers worldwide: Seagate, Western Digital, Hitachi, Toshiba and Samsung. They are also active on the downstream market for ESDs. In addition, there are several non-integrated ESD suppliers such as LaCie, Freecom, Buffalo and Iomega, which depend on the HDD producers to supply them with HDDs.
The Commission’s investigation pointed to the existence of separate markets for HDDs, SSDs and ESDs due to their different product characteristics, different prices and presence of different suppliers. In addition, the market investigation suggested that there may be separate sub-markets within HDDs based on end-use and form factor, given the limited demand-side substitutability.
The Commission will now investigate the proposed mergers in-depth to determine whether the initial concerns are confirmed or not.
More information on the cases:
http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=2_M_6203
http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=2_M_6214
Comments
Both Seagate and WD are facing regulatory approvals in Europe as well as
in USA for their acquisition announced at about the same time. The
previous EU (or EC) deadline for a decision on the Seagate and Samsung deal was
Monday, while that for WD and Hitachi was Tuesday, according to Reuters. Before this press release, several European companies have received a questionnaire from EU as well as FCC, also investigating on that matter, to get their opinion. In the US, Dell and HP seem to be especially concerned.
It's a risk to have only three HDD makers as we already wrote, not only
"for non-integrated ESD (non-integrated external storage devices)
suppliers such as LaCie, Freecom, Buffalo and Iomega" as wrote the
European Commission, but also for many other ESDs in the world, and,
more than that, for all the OEMs and PC manufacturers integrating HDDs
in their computers, not including HDD component (disks, heads, motors,
interfaces), RAID and set-top box makers, storage integrators, disk
duplicator firms and some A/V firms - all these companies needing a disk
drive in their solutions or being customers of the HDD makers. All disk drives customers are worried about this huge consolidation.
The WD's transaction was expected to close during the third calendar
quarter of 2011, subject to customary closing conditions, "including
regulatory approvals," and the Seagate's acquisition at $1.375 billion
was expected to close by the end of calendar year 2011. Even if they get
regulatory approvals, it will be difficult for both companies to
respect these dates. EU regulators have until next October 10 to reach
final decisions. WD has decided to postpone to December an eventual completion of its acquisition.
In the press release above, the name of unknown Viviti Technologies Ltd.
is cited. It's is a subsidiary of Hitachi Ltd. based in Singapore
with the same president and CEO of Hitachi GST, Stephen Milligan. For
the WD/HGST deal, WD is supposed officially to acquire all shares of
Hitachi GST's holding company, Viviti Technologies Ltd., in a cash and
stock transaction valued at $4.3 billion.
What could happen if the regulators
finally decide to prohibit the two
deals?
One of our sources suggests that, if the FCC gives its agreement, EU will follow. This source also told us that Seagate filed its case just before WD and that the first decision of the regulation bodies will concern Seagate/Samsung deal. It adds: "The main argument of Seagate: we will not invest in our business without Samsung because the HDD market is going down."
If the transactions have not been consummated and the requisite regulatory approvals have not been obtained, John Coyne will be obliged to sign a bank check of $250 million to Hitachi and Steve Luczo another one of $72.5 million to Samsung.
In this case Seagate will be nevertheless the winner, keeping its leading position in revenues in front of WD.
But the situation will be complicated as Samsung and Hitachi want to
get rid of their HDD business. HGST could try an IPO, an operation that
was decided before the announcement of the acquisition. We can also
imagine a third-party, an investment company like Silver Lake or a big PC manufacturer, trying to
buy one or both firms at a much lower price, this time without the risk
of facing regulatory approval.
Read also:
FTC Asked Seagate for More Information
On Samsung HDD acquisition
Seagate Buying Samsung HDD Just to Stop WD/Hitachi
Deal?
Speculation? Yes, but plausible.
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