Western Digital (WDC) agreed to acquire Hitachi Ltd.'s (HIT,
6501.TO) hard disk drive business for about $4.3 billion in cash
and stock, the two companies said Monday, in a deal that will
create a dominant player in the segment with a nearly 50% market
share.
Under the terms of the deal to acquire Hitachi Global Storage
Technologies Ltd., Western Digital will pay $3.5 billion in cash
and issue the Japanese electronics conglomerate 25 million of its
own shares. Hitachi would own about 10% of Western Digital's stock
after the issuance.
Western Digital shares, down more than 11% over the past 12
months, jumped 15.4% to $34.64 in recent trading. Hitachi climbed
4.7% to $64.13.
The deal comes amid significant challenges for the HDD industry.
Once an integral part of all PCs, HDDs now compete with flash
memory products to be the main storage device for everything from
laptop computers to computer servers, whereas fast-growing products
like tablet computers do not use HDDs at all.
The merger gives Western Digital control of nearly half of the
market and helps it expand its presence in the higher-margin
enterprise segment, an area where Hitachi has been strong. As a
result, Western Digital boosted its long-term business model for
gross margin by about 100 basis points to 19% to 24%.
"WD's business model will change, reflecting new scale,
structure and product depth," Western Digital Chief Financial
Officer Wolfgang Nickl said during a conference call. He expects
the company to operate on the new model within six months of the
deal closing.
As for Hitachi, the deal marks a significant milestone in the
company's ongoing shift away from its consumer electronics-related
operations toward its future growth drivers in large infrastructure
businesses such as railways and power generation.
Hitachi bought the HDD operation from International Business
Machines Corp. (IBM) in 2003 for about $2 billion, but it struggled
to turn a profit as prices for hard disk drives plunged amid
intense global competition.
"To continue delivering solid performance next fiscal year and
beyond, we need to secure ample funding to back up our business,"
said Hitachi President Hiroaki Nakanishi at a press conference on
Monday in Tokyo. "In that sense, this sale (of the HDD business) is
very important," he said.
In the fourth quarter of 2010, Western Digital accounted for
about 31% of the total market while Hitachi totaled about 18% of
shipments for HDDs, according to research firm iSuppli. Together,
the two companies would dwarf No. 2 Seagate Technology Inc. (STX),
which accounted for 29% of shipments.
Western Digital executives said they would work to avoid share
losses that typically accompany such deals and that they believe
integration, while not easy, would be successful.
Executives also expressed confidence the takeover would receive
regulatory approval in four to 12 months, with expectations for the
deal to close in the third calendar quarter.
"We believe the combination creates greater scale and operated
efficiently, will create value that we'll share with customers,"
Western Digital President and Chief Executive John Coyne said. "It
also increases competitiveness to the benefit of customers. That's
what regulatory is looking at when they do reviews like this."
Western Digital expects the deal to immediately add to its
per-share earnings, excluding acquisition-related expenses,
restructuring charges and amortization of intangibles. The company
also expects to cut operating expenses with the combined company
and carry out restructuring actions.
Western Digital is strong in the consumer market for external
HDDs, while Hitachi has solid footing with large corporate
customers. In addition, there is very little overlap geographically
with Western Digital's main customer base, which is located in
North America and Europe, versus Hitachi's strength in Asia.
Meanwhile, analysts said the deal is positive for the industry,
with increased consolidation helping the price structure of HDDs,
which have become commoditized.
"Hitachi was the price aggressor," Capstone Investments analyst
Shebly Seyrafi said. "In one fell swoop, Western Digital is
improving its enterprise share, removing the price aggressor and
becoming the clear share leader."
Western Digital rival Seagate grew 11.2% to $13.83 in recent
trading.
Steve Milligan, president and chief executive of the Hitachi
unit, will become Western Digital's president. Two Hitachi
representatives will join Western Digital's board.
Hitachi said the hard disk drive unit's operating profit rose
six-fold to $645 million in 2010 on revenue of about $6
billion.
In January, Western Digital reported earnings fell 47% in the
quarter ended Dec. 31. In a sign of the price pressure and tough
competition facing the business, Western Digital's revenue fell
5.5% to $2.48 billion in the three-month span even though shipments
rose 5.5%.
-By Daisuke Wakabayashi of The Wall Street Journal and Shara
Tibken of Dow Jones Newswires; daisuke.wakabayashi@wsj.com;
shara.tibken@dowjones.com
-Juro Osawa and Matt Jarzemsky contributed to this article.
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