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Storage sale SHOCK: WD to buy Hitachi GST

Coyne's coup

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Western Digital is buying Hitachi Global Storage Technologies for $4.25bn in a friendly takeover – so much for a Hitachi GST IPO.

The money comes as $3.5bn cash and 25 million WD shares, worth $750m at a $30.01 share price. It will be funded from WD's cash and about $2.5bn of debt. The combined company will be much bigger than Seagate, the world's number one disk drive manufacturer by revenue. WD passed Seagate in units shipped last year. Hitachi Ltd, which owns Hitachi GST, will own about 10 per cent of WD shares after the transaction completes, and Hitachi will have two directors on WD's board. The resulting company will still be called Western Digital and the transaction is expected to close during the third quarter of the year.

WD's senior executive ranks remain unchanged, John Coyne staying on as CEO, although Hitachi GST CEO and president Stephen Milligan becomes a president at WD, reporting to Coyne. We have no idea how real that job is. Maybe he will drive the product and marketing integration efforts.

Hiroaki Nakanishi, president of Hitachi Ltd, said: "As the former CEO of Hitachi GST, I always believed in the potential of Hitachi GST to become a larger and more agile company. This is a strategic combination of two industry leaders, both growing and profitable. It provides an opportunity for the new company to increase customer and shareholder value and expand into new markets. Additionally, it is important to us that WD shares common values with Hitachi GST to create a more global company that is well positioned to define a broader role in the evolving storage industry."

Hitachi GST had made noises about filing for an IPO this year. In fact, back in November, it was official: no more. Maybe the certainty of WD's dollars was stronger than the variable outcome of an IPO for Hitachi.

WD had also been identified as a potential acquirer of Seagate when that company toyed with the idea of going private a few months ago. However Seagate decided it could make more money by remaining public and abandoned the idea after potential purchasers offered too little cash. Perhaps the possibility of this deal opened WD's eyes to the potential in acquiring Hitachi GST.

One aspect of the deal is that WD gets access to the Hitachi GST/Intel solid state drive (SSD) project, which should give WD an entry into the enterprise SSD market. It had been expected that Hitachi Data Systems would use the Hitachi GST/Intel SSDs and Nakanishi's comment can be viewed as supportive of this.

WD now gets its hands on Hitachi GST's disk drive range. In the 3.5-inch area that means the Ultrastar enterprise drives and Deskstar ranges, giving WD a 15K rpm 6Gbit/s SAS and 4Gbit/s Fibre Channel drive as well as a 3TB SATA drive. Bingo: WD will be an enterprise drive supplier. Seagate must be bitter indeed about the added competition it is going to face.

WD also gets a CinemaStar range of drives for PVRs and the like. Then there are Travelstar 2.5-inch mobile drives, as well as 2.5-inch versions of the Ultrastar and Cinemastar ranges. WD will just have to sort out Travelstar, Ultrastar (enterprise) and Scorpio overlaps here. The Ultrastar enterprise line and brand is probably safe because it's an area with little or no WD presence. The other brands may be subsumed into WD's own branding.

Hitachi GST also has an external storage line with energetic new management and an attractive interface product – LifeStudio – for cataloguing media files. This will require some integration into WD's own external media storage line and some hard choices may have to be made about which brands survive.

There will almost inevitably be staff rationalisation as well, in such areas as back office processing, operations, sales and marketing and, possibly, research and development. The numbers could ultimately run into the hundreds, although this is just a guesstimate. Nothing has been said about this by either company.

The takeaways from this deal, if it completes, is that the hard disk drive industry consolidation trend just took another turn, and Seagate comes out of it facing very much stronger competition. WD can add Hitachi GST's manufacturing facilities to its own, involving possible rationalisation, resulting in a hopefully lower cost per disk drive and so more profitability. WD accelerates its enterprise SSD product availability and becomes the leading hard disk drive supplier by volume and by revenue. It is the storage industry's heavyweight HDD supplier without question and this is a tremendous coup by John Coyne. ®

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