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Hitachi GST: Sale or IPO?

'Ere... wanna buy a high-ranking disk drive operation?

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Opinion Hitachi is reported to be considering an IPO or sale of Hitachi GST, its disk drive operation, ranked third in the industry behind Seagate and Western Digital. How much is it worth? Who would want to buy it?

IPO

Hitach GST had revenues of $4.8bn in 2009. We can look at the annual revenues of Seagate and Western Digital and relate these to their market capitalisation to get an idea of how Hitachi GST's revenue could relate to its potential market capitalisation - how much the stock market would think it would be worth.

Seagate's fiscal 2010 revenue of $11.4bn is 2.2 times its current market capitalisation of $5.27bn. Western Digital's latest annual revenue of $9.8bn is 1.6 times its $6.10bn market capitalisation. Applying the same relationships to Hitachi GST's 2009 annual revenue gives us a potential market capitalisation of $2.18bn to $3bn, with $2.6bn as the rough mid-point.

If Hitachi GST were put up for an IPO would investors stump up $2.6bn for it? Storage array suppler Nexsan pulled its IPO in April. Hitachi GST has a relatively recent history of being profitable, and operates in an industry with highly complicated and frontier-pushing technology. It also has to operate with intensely detailed and intricate manufacturing processes.

We are not talking about a startup here with glamorous growth prospects in a potentially booming market, but a relatively mature number three player in a stable and steadily growing market. That doesn't sound exciting for investors. It's riskier than a utility company play with dependable revenues but less so than, say, a solar energy start-up.

Falling between the two extremes of investment dependability and high-growth prospects, Hitachi may be better advised to look for a sale of its GST operation.

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