EU Approves WD Acquisition of Hitachi GST

The European Commission has approved under the EU Merger Regulation the proposed acquisition of Hitachi Global Storage Technology (HGST), a subsidiary of Hitachi of Singapore recently renamed Viviti Technologies, by rival Western Digital of the US.

The approval is conditional upon the divestment of essential production assets for 3.5-inch HDDs, including a production plant, and accompanying measures. Western Digital cannot complete the acquisition of Viviti until it has found a suitable purchaser that is approved by the Commission.

"Hard disk drives are a key component of computers and other sophisticated electronic devices as they are used to store a growing bulk of data in the digital economy. The proposed divestiture will ensure that competition in the industry is fully restored before the merger is implemented," said Commission Vice-President in charge of competition policy Joaquín Almunia.

The Commission’s in-depth examination showed that there are separate worldwide markets for HDDs based on their form factor (3.5-inch or 2.5-inch) and end use (such as desktop computers, mobile computers, consumer electronics devices and enterprise business critical and mission critical applications). The Commission also identified a separate market for external HDDs (or XHDDs), which is downstream from HDDs, in the European Economic Area (EEA) .

On the markets for 3.5-inch desktop HDDs and CE HDDs, the merged entity would only face competition from the recently merged Seagate/Samsung. This is a problem because for security of supply reasons, most customers on these markets multi-source HDD purchases. Toshiba only recently entered the market for 3.5-inch business critical HDDs and it is uncertain whether it could replace the competitive constraint presently exerted by Viviti..

To gain regulatory clearance, Western Digital proposed to divest essential production assets for the manufacture of 3.5-inch HDDs, including a production plant, the transfer or licensing of the IP rights used by the divestment business, the transfer of personnel and the supply of HDD components to the divestment business. WD committed not to close its proposed acquisition of HGST before concluding a binding agreement for the sale of the divestment business to a suitable purchaser approved by the Commission.

As a result, the Commission concluded that the proposed merger, as modified by the commitments, will not significantly impede effective competition in the EEA.

Background
Western Digital notified its proposed acquisition of HGST to the Commission on 20 April 2011. Pursuant to a priority rule (‘first come, first served’) based on the date of notification, the present merger is assessed taking into account the Seagate/Samsung merger in the same sector that was notified one day earlier and approved by the Commission on 19 October (see IP/11/1213).

After the Seagate/Samsung merger, there remain worldwide four active HDD suppliers: Western Digital, HGST, the merged Seagate/Samsung and Toshiba. The proposed WD / Hitachi transaction would reduce the number of competitors to three and in some markets to two. The Commission was concerned that the transaction would have a negative effect on prices and consumers in Europe and opened an in-depth investigation in May 2011. A statement of objections, setting out the concerns, was sent to the parties on 18 August.

Comments

WD is not lucky. After the flood in Thailand impacting its activity as never before, after the arbitration decision vs. Seagate entitled to recover compensatory damages of $525 million, the conclusion of EU to approve its acquisition of Hitachi GST - recently renamed Vititi Technologies - is submitted to important conditions that WD will have to respect before the finalization of the deal.

They are not small ones. "The divestment of essential production assets for 3.5-inch, including a production plant, and accompanying measures. Western Digital cannot complete the acquisition of Viviti until it has found a suitable purchaser that is approved by the Commission."

Seagate was happier to get an approval without any condition from EU, the most concerned by the competition because there is no HDD maker at all in Europe. Seagate and WD deals were also conditioned upon the receipt of approval from the United States, the People's Republic of China, Japan, Korea and Mexico, but much easier to get.

On its side, EU estimates that, with three HDD manufacturers at the end - Seagate Toshiba and WD, - the competition will be affected with only two of them in 3.5-inch desktop HDDs, since the third one, Toshiba, is solely involved in 2.5-inch HDDs and in 3.5-inch enterprise units following its acquisition of assets of Fujitsu.

WD has now to find a buyer and approved by EU.

To sell what? Rumor: its manufacturing plant in China. We have never heard about any WD's HDD assembly plant in China. We only know that the company has a subsidiary in the country, Western Digital Information Technology (Shanghai) Company Ltd., and that HGST has its biggest facilities there. In any case, that's not a good step for WD as its Thailand plants are momentary stopped.

Which company could be the buyer? Seagate? No, it will not change the competition on 3.5-inch PC HDDs and EU couldn't accept that.

Other U.S. rumors: Toshiba or TDK. Toshiba never was interested by the production of these devices. TDK is involved in disk heads, not HDD assembly. But both of them could change their business model if the price is low enough. TDK is a big customer of WD as a second source for heads and their good relationship could help. Furthermore, if it's TDK, EU will appreciate that there will be at the end not only three but four HDD manufacturers.

There is also another question. Will WD be in the financial position to buy Hitachi GST at the same high price announced last March, $4.3 billion, after the Thai catastrophe and the realization of the EU conditions? If the deal is canceled, WD we will be required to pay a termination fee of $250 million to Hitachi.