More on Acquisition of Hitachi GST by WD, Finally for $4.8 Billion

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After one year of hard and costly work, the transaction is expected to close during the third calendar quarter of 2012.

The deal was late to finalize because it was subject to regulatory approvals from EU and a lot of countries. WD is obliged to apply all of them, the strongest conditions being imposed by EU and China.

It's finally done at a price of 4.8 billion, substantially more than the initial price announced in March 2011, $4.3 billion. WD had to pay an additional charge of $392 million due to an amendment made to the purchase agreement.

Hitachi, Ltd. will get about a 10% stake in WD and the right to appoint two members to the board of directors of WD. It said it would book a $2.4 billion special profit on the sale of HGST.

The acquisition is done but not totally finalized. Among the conditions to comply with regulatory requirements, there are two main ones.

WD obliged to sell some HGST assets to Toshiba
WD will be divesting certain HGST assets to Toshiba, including manufacturing equipment and IP that will enable the Japanese HDD maker to enter the 3.5�inch desktop and CE market segments and expands their capacity in 3.5�inch near�line enterprise.

More precisely the divestiture will include the products for the one, two and three platter 3.5�inch 1TB/platter HGST platforms, associated production equipment and a limited set of WD test equipment.

On its side the Japan Fair Trade Commission gave a percentage: WD will have to sell 10% of its 3.5-inch HDD production.

WD agreed to contract manufacture the transferred products for a period of time to allow for the orderly transfer of the production lines to Toshiba or a designated contract manufacturer, enabling Toshiba to compete immediately in the 3.5�inch desktop/CE HDD market. "It is anticipated that the manufacturing transfer can be complete within 6 to 12 months," said WD. Furthermore HGST will continue to build and support all its 3.5�inch desktop and CE products until closure of the divestiture. Post divestiture, it will continue to make other existing 3.5-inch desktop and CE products until the end of their production lives to meet customer demand and warranty obligations (i.e. 500GB and 667GB per platter products).

WD and Toshiba also entered into a supply agreement for heads and media.

For the moment WD has not yet made any decision on the future operation or use of the acquired Toshiba facilities in Thailand but plans to integrate the workforce into the its own Thailand operations.

Obligation to separate operations and to compete!
For WD, the worst came from the Ministry of Commerce of the People's Republic of China (Mofcom) that imposes WD and HGST to operate almost independently for two years, producing separately their HDDs, keeping their own development and R&D separately, not exchanging information, continuing to use their sales teams, and not exchanging information on prices, supplies or customers, and to apply in 2014 to remove these restrictions.

Once more WD has no choice but to strictly follow the Chinese recommendations. Remember that the main HGST's HDD plants are in Shenzhen, China.

Mofcom also obliged Seagate to operate Samsung HDD line as a separate subsidiary for the one year.

We have never encountered such a situation in any industry. One company acquiring another one and obliged to be almost completely separate, without consolidation and synergy, for two years.

That's why the new WD will operate as holding with WD Technologies and HGST as wholly-owned subsidiaries.

On this strange situation, WD's CEO John Coyne stated:" Similar to successful multi-brand customer models in other industries, the two subsidiaries will compete in the marketplace with separate brands and product lines while sharing common values of customer delight, value creation, consistent profitability and growth." It's not a lot.

But how can it work? Under the regulatory conditions, how will it be possible not to exchange information to publish financial results? In the newly-created office of the CEO headed by Coyne, there are also Steve Milligan, president and CEO of HGST, Tim Leyden, COO, and Wolfgang Nickl, CFO. Will they speak only about "customer delight, value creation, consistent profitability and growth", and never about sales, marketing, administration, new products and technology, etc. We doubt or the office of the CEO's meetings could be very short. And how China's Mofcom will be able to verify its conditions, not being invited to participate to these reunions? How a man and his wife can live together never speaking about their children?

Conclusion: if WD follows strictly all the regulatory requirements, we shall have five "independent" HDD manufacturers (HGST, Samsung, Seagate, Toshiba and WD) for one year, four (HGST, Seagate, Toshiba and WD) the following year, and then three (Seagate, Toshiba and WD) in 2014.