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Hitachi GST going for IPO

Preparations for offering under way

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It's an IPO: Hitachi is sending its wholly-owned disk drive making subsidiary, Hitachi GST, out into independence via an Initial Public Offering (IPO).

Hitachi intends Hitachi GST to have a listing on the New York Stock Exchange or NASDAQ (National Association of Securities Dealers Automated Quotations) in cooperation with Hitachi. Previously it had suggested either an IPO or a sale might happen. It is keeping its HItachi Data Systems subsidiary in-house.

Hitachi GST says it expects to use the cash received for ongoing operating and capital expenditures, research and development, strategic activities and general corporate purposes.

When will the IPO happen? Both Hitachi and Hitachi GST are going to look at economic and capital market conditions to find the optimum time. It's bound to be some time in 2011 in our view if it happens though.

Hitachi GST is the third-largest disk drive manufacture in the world, after Seagate and Western Digital who each have 30 to 31 per cent of the market by volume, compared to Hitachi GST's 17 per cent. The company has just reported third quarter revenues of $1.49bn, a 16 per cent increase on the year-ago quarter, but a 0.4 per cent decline compared to the second 2010 quarter. Its operating income was $138m, down on the preceding quarter's $186m; business is not booming.

It is ironic that Hitachi GST is thinking of floating itself on the market to raise cash while Seagate is thinking of leaving the market to get private equity buyout cash.

Companies go into private equity ownership generally because the new owners think they can run it better by reducing costs and refocusing engineering, products and services on growing markets.

Hitachi is reshaping itself and apparently prefers to invest the cash it has in Hitachi GST elsewhere, where it can generate a better return. Hitachi GST is profitable but, like all the disk drive companies, it faces a costly transition from today's PMR recording technology to its successor. It also needs to enlarge its manufacturing operations to pump out more disk drives if it is to gain market share and make more money. Our understanding is that parent Hitachi does not want to fund this. We might think it believes, as does Hitachi GST senior management and its advisors, that share buyers will be willing to take a gamble that it itself is not willing to take.

For example, it might be the case that if investors took Hitachi management's actions at face value they would be better off investing in Hitachi directly rather than in the to-be-spun-off subsidiary it is not willing to fund.

Seagate faces the same drive recording media transition costs. It is not generally understood to be a poorly managed and operated company by any means, the reverse in fact, yet it is thinking of leaving the market. The suspicion is that private equity buyers scent an opportunity to reshape the company and make a killing by floating it again later, thinking it is valued cheaply by the stock market at present.

Hitachi GST today launched a G-DRIVE slim external drive, using its 7mm Travelstar Z5K320 drive inside, claiming it is the thinnest 2.5-inch external hard drive in the world. The 320GB product is said to be a a perfect external storage companion to Apple's Macbook line. ®

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