Western Digital aims at enterprise with Hitachi GST buy

Western Digital Corp. said Monday it has reached a US$4.3 billion deal to buy Hitachi Ltd.’s hard disk manufacturing subsidiary, in an effort to further expand its reach in the enterprise, mobile, and solid-state drive markets.

Under the terms of the deal, the Irvine, Calif.-based hard drive maker will pay US$3.5 billion in cash and another US$750 million in Western Digital shares to acquire Hitachi Global Storage Technologies. With the 25 million Western Digital shares, Hitachi will own 10 per cent of the company when the transaction closes in the third quarter of this year.

The board of directors for each company has approved the transaction. Western Digital CEO John Coyne will remain as the leader of the company, with Hitachi GST chief Steve Milligan joining the company as the president.

In a conference call on Monday morning, Western Digital stressed the enhanced intellectual property, R&D and engineering benefits of the deal.

“As for the combination of our two entities, we will have the hard drive industry’s broadest product portfolio across the mobile, desktop, enterprise, consumer electronics, branded, and solid-state drive markets, providing a tremendous value to our customer base,” said Western Digital’s operating chief Tim Leyden.

In addition to increasing its efficiency and competitiveness in the global storage market, the company also said it would be able to cut operating expenses as a result of the deal.

Last year, Hitachi GST unveiled a line of enterprise-class SSDs, which it had been developing with chip-maker Intel Corp. In 2009, Western Digital also branched into the enterprise SSD market after its purchase of SiliconSystems Inc.

Brian Babineau, vice-president of research and analyst services with the Enterprise Strategy Group Inc., called the move a “very interesting” one for Western Digital. But, he added, the acquisition is not surprising for the industry in general.

“The disk drive market is going through a transformation where scale is being challenged by competitive solutions,” he said. “PCs sales with disk drives are declining because of tablet offerings including the iPad which leverage flash. Servers are being consolidated using virtualization solutions from the likes of VMware, Microsoft and Citrix. And enterprise storage system vendors are beginning to ship products with solid state and other flash solutions.”

Babineau said that if disk drive volumes remain flat or decrease, the suppliers will start feeling the heat because their business model relies on scale. This has already begun to take shape, he added, with prices declining as suppliers try to manage inventory.

“When scale and pricing are challenged, industries consolidate. For the disk drive sector, it was simply a matter of who was going to be the aggressor,” Babineau said.

With Hitachi GST, Western Digital will boost its enterprise storage business and expand its scale. Babineau added that the move will also help pricing by eliminating a competitor.
“There is also opportunity to push the component supply chain to lower prices as the remaining disk drive suppliers have achieved their own purchasing power,” he said.

Mark Peters, a senior analyst with ESG, followed a similar theme as his colleague. “I think a huge amount of this is about scale, economies of scale, scale of R&D, scale of portfolio,” he said. “And did I mention scale?”

“Making money in this high-volume business requires scale in most respects,” Peters said. “ I say ‘most’ because the loss of a major competitor leaves the potential for less aggressive pricing.”

Hitachi GST has innovated reasonably well across drive components and has a more established presence in the enterprise server and storage systems market than Western Digital, Peters said.

“Western Digital was making significant progress in attacking those enterprise markets and now they can do it faster while improving scale,” he added. “Now HDS can concentrate on its IT stack more, as the big systems vendors like HP and IBM already do, and leave the disk business to the remaining few.”

John Sloan, lead analyst with London, Ont.-based Info-Tech Research Group Inc., said the deal puts Western Digital in a strong position as a hard drive supplier to the enterprise storage market against its main rival Seagate Technology LLC.

“It also gives Western Digital access to Hitachi’s SSD products and development efforts,” he said. “That will bolster Western Digital’s position as more enterprise storage moves from disks to SSDs.”

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