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Western Digital to buy Hitachi disk-drive unit for $4.3 billion

The Irvine company would acquire Hitachi's storage-device subsidiary, one of its competitors, with a combination of cash and stock. Shares of Western Digital surge on the news.

March 08, 2011|By Tiffany Hsu, Los Angeles Times

Western Digital Corp., a familiar name in the computer industry, is poised to get a bit more familiar with the $4.3-billion acquisition of Hitachi Ltd.'s data storage business.

Computer hard drives made by the Irvine company would make up more than half of the global market share, easily outpacing Seagate Technology, its longtime rival for the market leader position.

Analysts said the deal is an effort by Western Digital to solidify its position at a time when sales of tablet computers and flash memory drives are surging while hard drives are sliding.

"This doesn't cure the problems the hard disk drive industry faces, namely tablets accelerating the transition away," said Shebly Seyrafi, an analyst with Capstone Investments. "But although it's still not a perfect market for them, it's a better market than it was yesterday."

Although still common in desktop and portable computers, hard disk drives could be headed for a 4% sales slide in the first quarter as demand for PCs slips, according to research firm IHS iSuppli. And faster and smaller solid-state drives, or SSDs, are gaining steam along with tablet devices such as the Apple Inc. iPad.

Western Digital's earnings plunged 47% to $225 million in the second quarter from $429 million a year earlier. Revenue tumbled 5.5% to $2.48 billion, even as hard drive shipments rose to 52.2 million units.

Western Digital would be able to ship upward of 80 million units a quarter with the acquisition of Hitachi Global Storage Technologies, a subsidiary of Japanese technology giant Hitachi, according to IHS iSuppli.

Acquiring a competitor like Hitachi, which has often had lower-priced products than Western Digital, helps ease the pressure, Seyrafi said.

The acquisition of Hitachi, the third-largest hard-drive maker in the world, would cost Western Digital $3.5 billion in cash and 25 million common shares worth $750 million.

Hitachi is also a major player in the profitable market for large-scale enterprise hard disk drives, often used for networked or multi-user systems and usually more reliable and expensive than standard consumer hard drives. Western Digital is a relative newcomer to the market.

The union would result in "significant operating scale, strong global talent and the industry's broadest product lineup backed by a rich technology portfolio," Western Digital said in a statement.

More than two years ago, Hitachi struck a deal to work with Intel on SSDs, which could give Western Digital an entry into the burgeoning market.

But Stephen Simko of Morningstar said the SSD threat is "overblown" and that the need for more data storage is "far from played out," although hard disk drives face challenges such as cyclical demand, falling prices and short product life.

The hard disk drive market has been steadily tightening for years, with more than 15 major players in 1995 shriveling to fewer than 10 in the early 2000s. Seagate completed its $1.9-billion acquisition of Maxtor in 2006, and Toshiba bought Fujitsu's hard disk drive business in 2009.

Hitachi bought its Global Storage Technologies arm from IBM Corp. in 2002, paying more than $2 billion. The subsidiary, based in San Jose, would abandon plans it announced in November for an initial public offering.

Its parent company — which makes construction tools, televisions, high-speed trains and other products — would end up owning 10% of Western Digital's outstanding shares.

Two Hitachi executives would join the Western Digital board once the deal closes in the third quarter, pending regulatory approval.

Hitachi Global Storage's chief executive, Steve Milligan, who left a post as Western Digital's chief financial officer in 2007 to join Hitachi, would return as Western Digital's president. He would report to Chief Executive John Coyne.

Western Digital currently employs about 63,000 people around the world. The company said it is "too early in the process" to gauge whether Hitachi employees will be laid off.

Both companies' boards have approved the deal. Western Digital stock jumped more than 15% to $34.68 on Monday after tumbling nearly 25% since March 2010.

tiffany.hsu@latimes.com

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