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WD cleared to gobble Hitachi GST

Complicated Brussels nod isn't a simple go for it

Internet Security Threat Report 2014

The EU has said Western Digital can buy the Hitachi GST disk drive business but only if it sells off some 3.5-inch drive production capacity to an EU-approved buyer.

The $4.3bn purchase of Hitachi GST, recently renamed Viviti Technologies, is conditional "upon the divestment of essential production assets for 3.5-inch hard disk drives (HDD), including a production plant, and accompanying measures", which include "the transfer or licensing of the IP rights used by the divestment business, the transfer of personnel and the supply of HDD components to the divestment business."

The commission thought that the acquisition of Hitachi GST would, with Seagate buying Samsung's disk drive business, reduce the number of disk drive suppliers to three – Toshiba being the third one.

It foresaw particular problems in the 3.5-inch disk market because Toshiba was a minor player in only the enterprise sector of the 3.5-inch market via a Fujitsu HDD business acquisition, meaning only two suppliers effectively: Seagate and WD.

This led to WD's divestment proposal with, obviously, only Seagate or Toshiba being potential purchasers and both of them knowing it will be a distress sale with WD anxious to sell so that it can complete the Viviti purchase, meaning low-ball bids will be the order of the day.

If Seagate buys the business, then there will still be only two effective competitors in the 3.5-inch desktop and consumer disk drive business. So the logic of the Commission's thinking leads to a Toshiba purchase, meaning three competitors, which, by extension, means that Toshiba, as the preferred or only buyer, could bid a really low price.

Joaquín Almunia, the Commission vice-president in charge of competition policy, said: "The proposed divestiture will ensure that competition in the industry is fully restored before the merger is implemented."

What nonsense. The merger won't fully restore competition as it and the Seagate-Samsung deal reduce five competitors to three. Selling off the odd disk drive plant won't change that one iota. If the EU lets Seagate buy the 3.5-inch plant then it is exacerbating the issue it defined as a problem. If it says Toshiba is the only approved buyer then it's getting WD to subsidise Toshiba's entry into a market it has eschewed up until now, and one Toshiba may not want to enter at all.

However, Stifel Nicolaus analyst Aaron Rakers, a close follower of WD, believes that TDK, a maker of disk drive heads and sliders, could be an alternative purchaser to Toshiba. Whether TDK would want to enter the HDD market, a market in which global industrial scale is now mandatory for lowering costs of operations, with a single plant, is questionable.

It's a bugger's muddle entirely due to European Commission meddling. Poor old WD has to fork out millions of dollars to re-build its flooded Thailand operation, pay Seagate half a billion bucks or more after an arbitration award, pay money for the follow-on technology to perpendicular magnetic recording, and now has to sell off a dratted 3.5-inch disk drive plant at a probable thumping loss to satisfy an EU bureaucrat's unrealistic idea of fully restored competition. ®

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