Western Digital Acquired SSD Maker sTec for $340 Million

To be incorporated into HGST

This is a Press Release edited by StorageNewsletter.com on June 25, 2013 at 3:03 pm

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Western Digital Corporation and sTec, Inc. entered into a definitive merger agreement under which sTec will be acquired by HGST, a wholly-owned subsidiary of Western Digital.

sTec will be acquired for approximately $340 million in cash, which equates to $6.85 per share. This represents approximately $207 million in enterprise value, net of sTec’s cash as of March 31, 2013.

The pending acquisition augments HGST’s existing solid-state storage capabilities, accelerating its ability to expand its participation in the rapidly growing area of enterprise SSDs. HGST remains committed to its joint development program with Intel Corp. and will continue to deliver current and future SAS-based SSD products with Intel.

sTec has engineering talent and intellectual property that will complement HGST technical expertise and capabilities. HGST will continue to support existing sTec’s products and collaborate with its customers to understand their future requirements.

"Solid state storage in the enterprise will play an increasingly strategic role in the future of Western Digital," said Steve Milligan, president and CEO, Western Digital Corporation. "This acquisition is one more building block in our strategy to capitalize on the dramatic changes within the storage industry by investing in SSDs and other high-growth storage products."

"This acquisition demonstrates HGST’s ongoing commitment to the rapidly growing enterprise SSD segment, where we already have a successful product line," said Mike Cordano, president, HGST. "We are excited to welcome such a talented team of professionals to HGST, where their inventive spirit will be embraced and encouraged."

"At this key point in the evolution of the storage industry, sTec is excited to consummate this transaction. It will be an important next step in proliferating many of the innovative products and technologies that sTec has been known for throughout its 23-year history and provides immediate value for our shareholders and a strong future for our employees and customers," said Mark Moshayedi, president and CEO, sTec. "This merger will enable our world-class engineering team and IP to continue to make a significant contribution to the high-performance enterprise SSD space that has long been sTec’s focus."

The board of directors of sTec, on the unanimous recommendation of a special committee of independent directors of the board, has unanimously approved the merger agreement and has resolved to recommend that sTec shareholders approve the transaction at a sTec shareholders meeting to be held to approve the merger agreement and the merger. The directors and executive officers of sTec have entered into separate voting agreements under which they have agreed, subject to certain exceptions, to vote their respective shares in favor of the proposed transaction.

Wells Fargo Securities, LLC has acted as the financial advisor to Western Digital and BofA Merrill Lynch has acted as the financial advisor to sTec in connection with this transaction.

Closing of the acquisition, which is subject to customary conditions, is expected to occur in the third or fourth calendar quarter of 2013.

Comments

sTec and the Moshayedi brothers can be happy to have found a buyer, and at a good price, $340 million, if you consider the most recent horrible financial results of the old SSD maker: revenue of $22 million for 1Q13 ended March 31, 2013 (-56% compared to 1Q12) with net loss of $25.5 million!

Above these ugly figures, the firm is or was engaged in several class action complaints notably including insider trading involving Manouch Moshayedi.

sTec was a pioneer in 2007 and a leader in enterprise SSD with big OEMs. EMC represented as much as 28.3% of total sales in 2011. Ten largest customers accounted for an aggregate of 85.3% of revenues during 2Q12, the top three being EMC, IBM and Hitachi accounting for around 70%. But the company was too slow to transition to next generation products: cheaper MLC-based enterprise SSDs, SSD cache software, PCIe accelerators (SSDs with PCIe interface faster than SAS and FC, are now a must for high-end applications), devices for the embedded market.
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The company progressively lost all its big clients, main reasons being the aggressive competition and price of its products being too high. Then recently it decided to sell to the channel but continues to deep.

The sTec's management has to be changed and note that Western Digital doesn't intend to keep the Moshayedi brothers as employees in the company.

In September 2012, we wrote: "The current price to acquire Stec is so low that some companies involved in storage could be interested to buy it, either to enter in a market where there are not participating (Dell, EMC, HP, NetApp, Oracle/Sun for example), or not strong enough and needing a better expertise in the field (Micron, Seagate, WD?). There was already in the past rumors of acquisition by Dell and Seagate."

Ironically, in an interview published in January 8, 2013, answering to the question, "There has been some rumors of acquisition in the past: Dell, IBM, Seagate ...", sTec's president and CEO Mark Moshayedi, said: "There has to be a reason why they would want to buy our company. Why would Dell be interested in acquiring an SSD company? Seagate haven't contacted us. Western Digital always tries to buy things for nothing."

And about Hitachi in the same interview:
Q.: But your prices are higher.
A.: Yes because we compete against company that are willing to sell without making money. Hitachi for example make money on HDDs. We are on the business of just selling SSDs.

sTec's activity will be incorporated into Western Digital's subsidiary HGST, no WD. HGST is largely more successful than WD in enterprise SSDs.

sTec decided recently not only to sell SSDs but also to enter into all-SSD subsystem. As soon as few days ago, the firm announced the worldwide availability of its first appliance, the s3000. Will HGST pursue this activity with the risk to compete with its own customers? It's possible as WD, on its side, is pushing external HDD systems and is going to announce enhancements in backup systems with acquired French company Arkeia.

SSD products of sTec and HGST are not really complementary. The two companies were competing in enterprise devices. Western Digital essentially acquires sTec's excellent IP and technical team.

sTec is the second acquisition of Western Digital in this field. It bought SiliconSystems in 2009 for $65 million.

Read also:
sTec: Fiscal 1Q13 Financial Results
Cannot be worst.
Stec's Part Owner Wants Company to Consider Alternatives
Including sale
Up and Down for Stec
Why?
Interview With Mark Moshayedi, President and CEO, Stec
"If there is a buyer there should be contacting us."

Here are some FAQs published
by Western Digital on the acquisition:

What is the strategic rationale of the acquisition?
The sTec acquisition is part of Western Digital's strategy to capitalize on the dramatic changes within the storage industry by investing in SSDs and other high-growth storage products. The sTec acquisition enables HGST to accelerate its participation in the rapidly-growing areas of enterprise SSDs. sTec has strong engineering talent and intellectual property that will complement HGST technical expertise and capabilities.

Does the acquisition require regulatory approval? Has MOFCOM approved this acquisition?
Yes, the sTec acquisition is subject to certain customary regulatory reviews and approvals. A MOFCOM filing is not required. We intend to work cooperatively with the regulators to obtain regulatory clearance as soon as possible.

Will Mark Moshayedi and Manouch Moshayedi, or any former sTec executives, be involved post-closing?
Mark Moshayedi and Manouch Moshayedi will have no ongoing role with the company, but we will work closely with them to ensure a smooth transition. The specific post-close organization structure will be determined as part of the integration planning process.

Does WDC inherit any liability exposure associated with Manouch Moshayedi's dealings with the SEC?
As a former officer of sTec, Manouch Moshayedi has an indemnification agreement with sTec. Under this agreement, STec is advancing Manouch Moshayedi's legal fees in the pending SEC action, and these payments will continue to be made after the transaction closes for the duration of the SEC action. At the same time, WDC and Manouch Moshayedi have separately agreed that, for any liability resulting from the SEC action, the maximum exposure to sTec and WDC will be limited.

What are the most significant challenges about the eventual integration of sTec into the HGST organization?
Our highest priority upon acquisition will be to capitalize on and retain the outstanding talent in the sTec organization and successfully integrate these professionals into the HGST SSD team.

Does the sTec acquisition complete the HGST SSD portfolio or are there other building blocks likely?
WDC is focused on executing our growth strategy and capitalizing on the many opportunities within the storage industry. M&A will be important as we look to expand our participation in cloud storage, solid state storage, Connected Life and other high-growth areas. We will continue to look for opportunities to accelerate technology innovation and product development efforts in order to better meet our customers' needs and demands.

Will this acquisition accelerate HGST's entry into the PCIe market? Are there strong PCIe assets being acquired?
As previously stated: HGST intends to participate in the PCIe segment of the enterprise SSD space. sTe has developed SSD products with a broad set of interfaces. The combined experience and talent of the engineering teams will strengthen our technical capabilities to enable a broad SSD solutions portfolio in support of our customers' expanding needs.

How many patents are being acquired?
STec currently has approximately 55 issued patents and 78 patent applications pending. All of these patent rights are included in the transaction.

Is this deal changing the Western Digital business model?
No. The acquisition augments HGST's solid state capabilities, but does not change the Western Digital business model.

Will Western Digital be able to stay at $550m per quarter for operating expenses?
Western Digital's 10-12% OPEX to revenue target business model remains unchanged. sTec is an ongoing business; while efficiency synergies have been identified that can be achieved with the HGST organization, there will be opex incremental to the approximate $550 million WDC quarterly opex run rate. The latter amount was established for the two drive subsidiaries at the time of the HGST acquisition by WDC.

When will this deal be accretive?
We expect to achieve accretion within 12 months after we close the transaction.

Will Western Digital receive sTec's cash?
Yes, as part of the acquisition.

Is Western Digital interested in exploring a deeper NAND relationship in the future?
We are excited about the sTec acquisition, as the transaction fits well with our strategy to invest in SSDs and other growth areas. We will continue to look for opportunities to grow in this area.

What are the anticipated benefits and synergies that can be gained by this acquisition?
The sTec acquisition enables a broader participation in the rapidly growing area of enterprise SSDs. sTec has strong engineering talent and intellectual property that will complement HGST's technical expertise and capabilities. We are continuing to assess the benefits and possible financial synergies as a result of the acquisition.

How does the acquisition complement HGST's technology?
The acquisition will complement HGST's technology position and IP portfolio. It will also bring valuable engineering and design resources that will allow us to accelerate our efforts across a broader portfolio of SSD products.

Does this focus on SSDs mean that WDC and HGST see more opportunity in flash solutions than in traditional HDDs?
SSDs represent a large, exciting growth area for HGST. However, HGST believes both SSDs and HDDs have a growing future in tiered storage for the datacenter. HDDs will remain the storage vehicle of choice for the bulk of data, storing 75% of all data, either in the cloud or locally, by 2020. SSDs are well-suited for datacenter applications and workloads - those involving highest I/O transactions and supporting applications such as cloud services, database workloads, and big-data analytics.

How much overlap is there in the enterprise SSD space between sTec's solutions and HGST's offerings?
sTec and HGST product offerings are largely complementary. sTec has developed SSD products with a broad set of interfaces, while HGST has a successful product line that has been developed in partnership with Intel Corp.

Will HGST continue to support the sTec product line?
HGST will continue to support existing sTec products and collaborate with its customers to understand their future requirements. There will be no change to sTec product availability through the close of the acquisition. Upon close, we will evaluate programs on a case-by-case basis to determine the go-forward strategy.

What impact does this announcement have, if any, on WD's SSD business and the SSD choices now being offered customers by the two subsidiaries?
The sTec acquisition, which is focused on enterprise SSDs, does not directly impact WD. We are continuing to comply with the MOFCOM hold-separate order with regard to HGST and WD. WD is building the products and relationships that will sustain its success in the market. WD recently announced its relationship with SanDisk for Solid State Hybrid Drives (SSHDs). These products are in qualification at a number of WD's strategic OEM customers.

What does the STec acquisition mean to HGST's current relationship with Intel?
HGST remains committed to our highly successful joint development program with Intel Corp. and will continue to deliver current and future SAS-based SSD products with Intel.

Who will be running the combined SSD business at HGST?
HGST CTO Steven Campbell will oversee the integration process upon close of the sTec acquisition. The specific post-close organization structure will be determined as part of the integration planning process.