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Consolidation Prize

Coyne was asked by another analyst, Robert Marson, about HDD industry consolidation: "... how do you sort of feel about the entire industry’s profit margin structure and sustainability thereof? I know that in the last four quarters, Western Digital and Seagate have made money. Hitachi for the full trailing 12 months has struggled, and the other Asian companies have either broken even or lost money."

"When I look at - when I try to roll up the businesses as best I can, I come to a high single, mid to high single-digit operating margin for the business. Do you feel there has been enough consolidation in addition to organic unit growth opportunities for the whole industry, so that existing pricing structures and profit margin structures can continue within the business, with Hitachi trying to become more profitable?"

Coyne's answer made a clear statement about further consolidation being unlikely: "... you know, when we look at consolidation, I don’t think there is any compelling trigger to drive further consolidation in the industry."

Additional remarks confirmed the general opinion about the relative status of the various HDD suppliers but also an interesting dependency upon TDK by some suppliers: "The way we look at the industry today, you’ve got Seagate, a very large, very capable, very profitable company generating significant cash. You’ve got Western Digital, a not so big, well-managed, low cost, high profit, high cash generation business. You’ve got Hitachi, who seem to be finally focusing on the fundamentals of cost structure appropriate to the market opportunities available to them and driving towards a positive outcome."

"And then the three - Toshiba, Fujitsu, and Samsung - essentially all dependent on the single merchant head supplier, TDK, for their products. And if you look at the financials of TDK, I think that’s where you see where the value is being captured. However, Fujitsu, Toshiba, and Samsung, as well as Hitachi, being divisions of large Asian corporate owners, it appears to me that as long as they produce marginally positive results on an ongoing basis, they will potentially keep being funded. However, we have seen evidence over the last year-and-a-half to two years that where they deliver negative results, the parents do not have the patience to allow that to continue for extended periods. "

Marson pushed back on this: "You’ve made your intentions known to enter the enterprise businesses. Is there any - and your chief competitor, Seagate, has sort of done its fair share in the consolidation movement - is there any chance you would try to purchase an enterprise drive business were it to become available?"

Coyne politely said 'No': "We are looking at all business segments in which we currently don’t participate and assessing the business cases for all of those opportunities. Our experience tells us that organic growth has been the thing that has generated the best results for us."

"As we’ve watched the outcomes of other people’s horizontal acquisitions at the drive level, while we have focused on vertical acquisitions at the component level and so we don’t currently have any designs on anything other than growing into segments in which we don’t participate where we can close a business case to generate profitable growth from that activity."

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